Bonds: Yields plummet on haven bid
Sovereign bond markets saw sharp moves in the aftermath of the announcement of a 5 July referendum in Greece, with analysts struggling to anticipate the probability of a Grexit, what impact it would have on global capital markets, other periphery economies (including on those countries´ internal politics) and the implications for the MPC´s and the Fed´s conduct of policy.
“The one element that has deteriorated [in the Eurozone] is politics. Grexit would be a political mistake – so what is the likelihood of another political mistake? Grexit will introduce redenomination risk over the medium-term,” analysts at Deutsche Bank wrote in a research report sent to clients.
“The chance of seeing a parallel to the Syriza government emerge elsewhere is relatively low, but focus will likely be on Spain and the risk of Podemos being part of a government coalition.”
As regards the probability of a 'no' vote in the referendum - which many in the markets believed would lead to a Grexit - analysts from the largest brokers seemed divided. The majority, on the other hand, seemed quite sure there would be no 'systemic' impact on the global economy, although some observers were slightly more cautious.
Greek 10-year bond yields jumped 330 basis points to 15%. While the Athens Stock Exchange remained closed by government decree, as of 19:21 shares in National Bank of Greece were down by 24.13% to $0.97 per share in NYSE trading.
Heading in the opposite direction, the yield on Gilts of the same maturity dropped 11 basis points to 2.08%, after having plumbed an intraday low of 2.02%. Benchmark US Treasury notes and German bunds saw similar gains on a flight to safety from investors.
Oddly enough, albeit not unexpectedly, euro-gbp jumped 2.19% to 0.7149 as traders unwound carry trades on heightened levels of risk aversion.
In remarks to the Financial Times on 26 June the president of the US Federal Reserve bank of New York, William Dudley, said the Greek crisis was a “huge wild card”.
“My personal view is if this goes badly the market reaction may be bigger than what we realise.”
Speaking to Bloomberg TV Allianz´s chief economic adviser Mohammed El Erian said the Mediterranean country had been left facing an 85% chance of falling out of the single currency area – which would throw the country into a very deep recession.
Hence, all eyes turned to Sunday´s referendum.
Italian and Spanish 10-year government bond yields suffered sharp falls, sending their respective yields higher by 24 basis points to 2.35% and 2.39%, respectively.
In other UK news, in a speech due to be delivered on Tuesday the Bank of England´s chief economist, Andy Haldane, will say that raising interest rates too early could risk another recession in Britain. consumers: “A policy of early lift-off could be self-defeating. It would risk generating the very recession today it was seeking to insure against tomorrow.”
“The current level of interest rates remains, in my view, appropriate to assure the on-going recovery and to insure against potential downside risks to demand and inflation.”