The bond markets have been highly volatile in the past few months and within that space, the sovereign debt markets across the Eurozone countries have been a big signal of sentiment for the market. The spread between the yield on German (core) and Spain (periphery) debt is an interesting chart to gauge what markets are feeling about Greece and risk. The dip today suggests that investors are becoming more confident again.
When investors feel the need for a safe haven, they look towards the German Bund, whilst when risk appetite and confidence is on the rise, safe havens will be shunned and peripheral Eurozone debt will be bought. Buying German Bunds over Spanish debt (ie. when investors feel risk averse) pulls the German yield lower relative to the Spanish and the spread increases.
The spread pulled sharply higher on Monday as markets reacted with fear over the potential fallout from Greece not accepting the terms of its creditors and it has subsequently defaulted on its IMF debt. However, on Wednesday, reports out of Greece suggest that polling over the Greek Referendum is getting closer (the No vote is losing ground). This has resulted in the spread falling back again. (The chart below it shows EUR/USD which does seem to be also moving around with the spread).
The creditors are looking to Greece to hold the referendum as they clearly feel that when push comes to shove, the vote which is effectively a vote for Euro membership, will result in a “Yes” vote. It is highly unlikely that Greek Prime Minister Tsipras will be able to continue to negotiate for his country in the event of a “Yes” vote seeing as he is actively campaigning for the “No” vote. The creditors see the referendum as a move towards not only getting Greece to agree to terms but also to having a change of government that is far less left leaning.
Watch for the movement on the spread between the German 10 year Bund yield and the Spanish 10 year to act as a gauge for market sentiment on Greece.
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