MW: Treasury yields tumble as Greece sparks flight-to-quality
Treasury yields tumbled Monday, as the latest escalation in the Greek saga, with the introduction of capital controls and an upcoming referendum, fueled flight-to-safety flows into U.S. Treasurys.
The buying rally in Treasurys started in Asian markets and continued in New York, as investors brace for heightened volatility in a holiday-shortened week that will end with the closely watched U.S. jobs report on Thursday.
On Sunday, the European Central Bank capped the level of emergency funding for Greece’s banking system, while Greek banks will be closed until July 6, to prevent capital flight as the country prepares for a July 5 referendum that will determine whether Greece will accept reform measures demanded by its creditors.
As European stock markets fell sharply and U.S. stocks also looked set to slide, government bond prices rose, as bonds are considered safe-haven assets at times of financial turmoil. When bond prices rise, yields fall and vice versa.
The yield on the 10-year Treasury TMUBMUSD10Y, -3.22% fell 12.7 basis point to 2.349%, according to Tradeweb, after gaining 21.1 basis points last week, the largest weekly gain in the month of June.
The two-year yield TMUBMUSD02Y, -7.14% declined 6.3 basis points to 0.653%, and the yield on the 30-year TMUBMUSD30Y, -2.29% Treasury fell 12.6 basis points to 3.123%.
In the eurozone, flight-to-quality flows sent the yield on the German 10-year TMBMKDE-10Y, -10.08% known as the bund, tumbling 11.2 basis points to 0.806%.
Conversely, yields on bonds in the so-called eurozone periphery, most notably in Spain, Portugal and Italy, were all up between 19 and 29 basis points. The Greek 10-year yield rose 388.2 basis points to 14.696%, after dropping of 190.7 basis points last week.
Direct exposure to Greece beyond the official sector — or other European countries and institutions such as the IMF — is minimal, as European banks have only €5 billion ($5.56 billion) exposure to Greece, in the context of €32 trillion ($35.6 trillion) balance sheet, a JPMorgan report noted.
But the “major market concern is that if Greece were to default and/or exit then it might encourage others to do the same. Thus it puts the entire eurozone project at risk of collapse,” Gary Jenkins, chief credit strategist at LNG Capital, said in a note.
For U.S Treasury investors, the Greek bailout saga does not only affect yields due to flight-to-safety flows but also complicates the Federal Reserve’s normalization process, as the Fed gets ready to raise interest rates for the first time in nearly a decade.
“The Fed will be on high alert for any market dislocations,” Ward McCarthy, chief financial economist at Jefferies, said in a note. “The latest Greece developments put [IMF Managing Director] Christine Lagarde’s suggestion that the Fed delay liftoff into 2016 into context, and her views may resonate more now than was the case when she first made them.”
Apart from the official jobs report due Thursday, investors will also be looking at a home-sales report scheduled for Monday, as well as reports on the manufacturing and construction sectors, as well as vehicle sales due later this week.
