FXStreet (Barcelona) – Martin van Vliet, Senior Rates Strategist at ING, shares his view on the possible reaction in the eurozone bond markets due to the ongoing Greece bailout crisis.
Key Quotes
“On balance, our guess is that flight to safety flows may see 10-year Bund yields tumble by at least 20-25bp (US 10yr Treasury yields have fallen by around 18bp thus far).”
“The two-year Schatz yield may fall back towards the -25bp level, while we would expect 10- year Italian and Spanish spreads relative to Bunds (Friday close: 122/118bp) to surge towards the 150-175bp range.”
“Semi-core spreads will probably also come under significant widening pressure, with the 10yr OLO/Oat-DBR spread possibly rising towards 50bp.”
“On the money market side we are braced for a fresh spike in FRA/EONIA and a sell-off in euribor futures.”
“Looking ahead, we doubt whether the heightened concerns about a Greek EMU exit, which is still not the most likely scenario in our view, will quickly dissipate. As for the market fall-out in coming days, much will depend on the (ECB) policy responses and the communication between Greece and its creditors in the run up to the referendum.”
“The ultimate showdown, in our view, still centres on the redemption due to the ECB on 20th July for EUR 3.5bn. These bonds are held by the ECB and so a default on these redemptions nor the IMF payment tomorrow would not (directly) impact private bondholders, and hence it would not represent a classic default as rating agencies have confirmed. But in case of a missed payment to the ECB it would be virtually impossible to maintain ELA support as solvency of Greek banks crucially hinges on tax credit-linked claims on the Greek government, which the ECB probably would have to significantly impair.”
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