Hopes for Athens vote dulls appetite for bonds

A peek into the future of the Greek nation has investors today believing that lawmakers will ratify the deep and lasting austerity measures that will also very likely pave the wave for the sale of state-owned assets into overseas hands. Optimism is overflowing in peripheral markets that the vote will see politicians support Mr. Papandreou's efforts. Dealers are also hopeful that plans to rollover maturing bonds will garner widespread acceptance among French and German creditors. Ratings agent Fitch says that the rollover plan would be a default. Not many investors have paid attention to this increasingly uncomfortable spat.

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European bond markets -Writing in a letter to eth Financial Times, London-based head of sovereign ratings David Riley warned that Fitch would "very likely" deem Greece in default if the plan goes ahead. Clearly the fireworks are not yet over for the European Union and even if the assumed passage of the bill goes ahead on Wednesday, there will surely be more drama in coming days. Yields rose on German 10-year bunds by four basis points to 2.92% while the September bund future is close to its session low trading at 126.47. Adding to a negative tone for fixed income was a comment from ECB Chief Trichet who warned that the central bank was still likely to fulfill its promise to raise interest rates this year. An above-expected reading for German consumer confidence for July from GfK also dented euribor futures following a healthy showing during the past several weeks with the strip in decline today by six basis points.

Australian bills - A dip in tensions hovering over the Greek Parliament allowed money market traders to breathe easier on Tuesday unwinding earlier bets that the Reserve Bank would soon be easing its monetary stance in response to the sovereign debt crisis. Bill futures fell by more than 10 basis points across the strip as traders unraveled bullish rate plays. The government 10-year bond also slid in response to an easing of tensions forcing the yield upwards by 11 basis points to 5.11%.

Eurodollar futures - A modest dip in the Conference Board's consumer confidence reading for June was largely lost in the growing chorus of optimism over the Greek vote on Wednesday. Bond prices were also lower ahead of a second day of treasury auctions, which bring the week's issuance to $70mm so far. The consumer confidence index slid to 58.5 from an upwardly revised 61.7 although the downtick caught most by surprise following a tumble in the cost of gasoline over the past several weeks. The Richmond Fed's regional manufacturing gauge on the other hand surprisingly rebounded from a state of contraction to expansion. Eurodollar futures accordingly were cut back down to size as fears over the economic outlook subsided. Most contracts were down by seven ticks by 11:30am in New York while the 10-year bond future expiring in September shed about one-half point to yield 2.96%.

Canadian bills - Implied yields expressed by bill futures trading in Montreal rose by three basis points as dealers continue to price out further rate increases on behalf of the Bank of Canada. The strip suffered by less than the dip in Eurodollar futures, but the cooler global economic forecast continues to dim the prospects of rate increases already baked-in to the Canadian curve. The Canadian 10-year government bond future shed 39 basis points as dealers sold bonds around the world and lifted the benchmark yield to 2.93%.

British gilts -With only minor economic reports on the calendar on Tuesday (GDP was a rehash of earlier data) investors had little choice but to join the selling witnessed by other fixed income markets. Bank of England MPC member Adam Posen trashed an earlier BIS report calling for inflation-fighting monetary tightening as "nonsense." On a normal day his argument pointing out low underlying inflation in the face of an official pace running at twice the mandated ceiling might have spurred a rally from the dovish trader community. However, the hawkish element is in ascendancy today as interest rate expectations take a knock on hopes for a positive Greek vote. Short sterling futures fell by up to eight basis points, while the yield on the 10-year gilt jumped by nine basis points to 3.25%.

Japanese bonds - Yields remained static on Japanese government debt with the cost of government borrowing for 10-years at 1.08%. Dealers were wary of relinquishing the safety of bonds ahead of the Greek vote despite some positive economic news. A measure of confidence among small businesses rose from 37.8 to 43.1 in June indicating a rebound in demand. Despite a rebound for Tokyo-listed stocks yields remain close to the lowest in seven months.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com       

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