European Bond markets not too concerned with latest Greek finance changeup

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Heather Mcardle, director Fixed Income Indices at S&P Dow Jones Indices comments on the implications of the replacement of Yanis Varoufakis with Euclid Tsakalotos for European bond markets.

Fears of a Greek default were subsided on Monday after an announcement that they would be replacing their current finance negotiator, Yanis Varoufakis, with a new team to negotiate with European creditors.  Many saw finance minister Varoufakis as not reacting quickly enough in preparation for loan negotiations this Wednesday.

This comes on the heels of concern that Greece could default on their debt and leave the Eurozone, should they not successfully negotiate a deal to receive funding.  Additionally, fears were allayed as Greece also seems to be making some concessions and acknowledging the need to limit early retirement and to revamp Greece’s tax system.

The shakeup in the finance delegation to face European creditors, coupled with Greece’s acknowledgment that reform is needed, seem to be satisfying bond investors across Europe.  The risk trade was “on” on Monday with Greek, Spanish and Italian government bond markets rallying sending yields lower, while the “flight to quality” countries like Germany and France saw their bond markets remain mostly unchanged.

If we take a look at the overall move of the markets in the past week, we see the S&P Spain Sovereign Bond Index has been on a downward yield trend, moving 13bps between April 17th to Monday’s close.    The S&P Italy Sovereign Bond Index has seen a similar downward trajectory moving 10bps, while the S&P Greece Sovereign Bond Index moved 3bps from 22.02% to 18.72% during the same timeframe.

The tightening of these specific European bond markets indicates that European investors seem to me more confident than not, that a resolution will be met to keep Greece on target for future funding.  The strength of the Spanish and Italian bond markets show contagion concerns may be decreasing.

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