Worries over a potential Greek exit from the eurozone triggered significant volatility in the debt of countries on the geographic periphery of the currency bloc on Tuesday, eroding the impact of the European Central Bank’s recent attempts to suppress borrowing costs by buying bonds.
Peripheral bond yields, which move inversely to prices, remain around levels seen late last year, before investors started anticipating the ECB’s €1tn bond-buying programme which launched in March and is aimed at stimulating the economy.
Prices for Greece’s sovereign debt dropped sharply on Tuesday, sending yields to the highest point so far this year. A sell-off in the country’s short term, 2017 bond pushed the yield to 29.24 per cent, while prices for the country’s benchmark 2025 bond fell from 53.4 cents on the euro to 50.9 cents on the euro.
The turmoil in bonds also sparked swings in equities, with a measure of implied volatility, the Euro Stoxx 50 Volatility Index, at its highest level since early January. The barometer of market fear tracks the cost faced by investors taking out options contracts as a hedge against price swings.
Money continued to move into the German Bunds, seen as a safer haven by investors. The 10-year Bund yield fell 3.6 basis points to 0.792 per cent.
“The market is now looking at a eurogroup meeting later this week as the last chance for a deal to be reached to avert a Greek default this month,” said Millan Mulraine, deputy head of US strategy at TD Securities.
However there were signs that the selling pressure on bonds in recent days had reached a limit on Tuesday as the market abruptly swung back from early losses. The ECB is accelerating its monthly bond purchases during June, a policy stance seen helping support the market.
The bank’s Fund Manager Survey for June covered more than 200 fund managers and found that 43 per cent of respondents said they were still expecting a deal to be reached between Athens and its foreign creditors. A further 42 per cent said Greece was likely to default on its debts but would not exit the eurozone.Market uncertainty over Greece failing to reach agreement from its creditors was underlined by the latest monthly survey from Bank of America Merrill Lynch, which said fund managers remain unprepared for any significant worsening of the Greek crisis, which could culminate in the country’s exit from the euro
Spanish 10-year sovereign debt yields rose as much as 11.5 basis points to 2.534 per cent — reaching their highest level since last August — before falling back to 2.424 per cent, up 4.3bp on the day.
Portugal’s government debt was also hard hit, with the yield up 10.6 basis points at 3.33 per cent, later retreating to 3.27 per cent, up 4.6bp on the session. While Italian 10-year yields moved up 13bp to 2.454 per cent, before falling back to 2.339 per cent, remaining around the highest level since November.
The euro eased on Tuesday, falling 0.5 per cent to $1.1226, but has remained resilient in recent days against the backdrop of volatile bond and equity prices.
Koon Chow, macroeconomics and foreign exchange strategist at Union Bancaire Privée, said investors were “reluctant to position for a Greek exit via the foreign exchange market”.
Mr Chow added: “They probably feel that [gaining exposure to] the balance of risks for a Grexit trade is better via shorting equities or being short peripheral European bonds against Bunds.”
Investors fear that any such default by Greece could lead to the heavily indebted nation leaving the eurozone, sparking further financial system uncertainty, especially elsewhere on the periphery, and jeopardising the continent’s fragile economy.
Talks between Greece and its creditors aimed at reaching agreement on the release of €7.2bn in desperately needed rescue funds for Athens collapsed last weekend, with both sides seemingly hardening their positions.
The breakdown in discussions with its creditors has pushed Greece closer to default and there are fears it may be unable to repay a €1.5bn loan from the International Monetary Fund, due in two weeks.