Bunds move higher after of Greek referendum

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Global core bonds initially profited from risk aversion as the outcome of the referendum (landslide victory No & Tsipras) raises chances of a Grexit. However, just like last week (after the surprise announcement of a referendum by PM Tsipras), core bonds couldn’t built on opening gains as the risk-off eased fast. Several factors might explain it. First, the convincing victory of Mr. Tsipras. It strengthens his hand in the Greek parliament and his party and may make the approval of an eventual negotiated deal easier in Athens.
Similarly, Greek parties declared to support Tsipras in his negotiations. Second, the clever resignation of FM Varoufakis, who had an acrimonious relationship with the Eurogroup, and whose replacement is considered a gesture of good will. Finally, market’s confidence that the ECB has the will and power to nip eventual contagion in the bud. So, further negotiations have become more likely, even if some European leaders remain lukewarm about re-opening negotiations after the “No” in the referendum. Today’s Eurogroup and EU Summit will tell us more about the EMU opening gambit. The ECB kept the ELA ceiling to the Greek banking sector unchanged, ignoring a request from Greek banks to raise it, but increased the haircuts by about 10% (to 60%) on some Greek collateral (symbolic to tighten a little bit the chains on the banking sector and up the pressure on the government).

In a daily perspective, the German yield curve bull flattened with yields nearly flat (2-yr) to 4 bps (30-yr) lower. US Treasuries outperformed, catching up on Friday’s developments when US markets were closed. The US yield curve bull flattened with yields 3 bps (2-yr) to 7.8 bps (30-yr) lower. Peripheral spreads (10-yr) widened by 6 bps for Ireland, 17 bps for Italy, 18 bps for Spain and 27 bps for Portugal. Greek assets significantly underperformed (+349 bps), further inverting the curve, as chances of Grexit increased.

Today, the calendar remains devoid of market moving eco data. The Eurogroup meeting, the EMU Summit and a speech of the Greek president are the highlights for traders The Austrian debt agency taps the on the run 5-yr RAGB (0.25% Oct2019) and 10-yr RAGB (1.2% Oct2025) for a combined €1.32B. In the run-up to the auction, bonds on offer cheapened around 3 bps in ASW-spread terms. On the Austrian curve, the 5-yr RAGB trades a tad cheap, while the 10-yr RAGB is somewhat rich. Overall we expect a plain vanilla auction. Currently, the Austrian treasury raised around 62% of this year’s expected funding need.

In the US, the treasury starts its mid-month refinancing operation with a $24B 3-yr Note auction. Currently, the WI is trading around 0.97%.

Overnight, Asian equity markets trade mixed with Japan outperforming and China underperforming. Chinese stocks trade again up to 5% lower despite recent policy action to underpin the crashing equity market. The US Note future trades flat, suggesting a neutral opening for the Bund.

Regarding trading today, the eco calendar is uninspiring and trading could be dull awaiting the outcome of the Eurogroup meeting and EU Summit on Greece. Rumours and comments could trigger intraday volatility. We hold our view that short term Bund strength might eventually be used to short the contract, preferably around 0.50% for the 10-yr Bund yield. Recent market reaction suggest that market either remains confident that an 11th hour deal will be reached or that they discounted the Greek tragedy. Our view is similar for the peripheral markets: short term, risk-off, spread widening could be an opportunity to increase exposure to the region.

The Austrian debt agency taps the on the run 5-yr RAGB (0.25% Oct2019) and 10-yr RAGB (1.2% Oct2025) for a combined €1.32B. In the run-up to the auction, bonds on offer cheapened around 3 bps in ASW-spread terms. On the Austrian curve, the 5-yr RAGB trades a tad cheap, while the 10-yr RAGB is somewhat rich. Overall we expect a plain vanilla auction. Currently, the Austrian treasury raised around 62% of this year’s expected funding need.

In the US, the treasury starts its mid-month refinancing operation with a $24B 3-yr Note auction. Currently, the WI is trading around 0.97%.

Overnight, Asian equity markets trade mixed with Japan outperforming and China underperforming. Chinese stocks trade again up to 5% lower despite recent policy action to underpin the crashing equity market. The US Note future trades flat, suggesting a neutral opening for the Bund.

Regarding trading today, the eco calendar is uninspiring and trading could be dull awaiting the outcome of the Eurogroup meeting and EU Summit on Greece. Rumours and comments could trigger intraday volatility. We hold our view that short term Bund strength might eventually be used to short the contract, preferably around 0.50% for the 10-yr Bund yield. Recent market reaction suggest that market either remains confident that an 11th hour deal will be reached or that they discounted the Greek tragedy. Our view is similar for the peripheral markets: short term, risk-off, spread widening could be an opportunity to increase exposure to the region.

In the US, US Treasuries trading will be dominated by global sentiment. This week’s supply is a marginal negative. Following last week’s data, we hold our September rate hike call. Increased global volatility is a risk factor. A move towards the upper bound of the recent ranges, could be used to short Treasuries.