Merkel is ‘winner’ as German yields stay low

After pursuing the toughest of tough negotiating lines, markets declared Angela Merkel and German bonds the victors from the weekend EU leaders’ summit by granting Greece a new €86bn bailout for three years without conceding to the demands of Greek leader Alexis Tsipras.

Despite enduring prolonged uncertainty over the weekend, eurozone sovereign bond markets ended little changed yesterday — with the cost to Germany of borrowing from debt markets remaining at low levels.

“The markets appear to have called it right — Greece is still in the eurozone and markets did not get too carried away before the weekend,” said Ryan McGrath, head of fixed income at Cantor Fitzgerald Ireland. “Europe again brought it right to the wire, but we have got used to that over the years, right up to the opening of the markets on Monday.

“The general consensus is that Europe took a hard line, and Greece has given in. The rhetoric of the press statement that everything was done was to keep Greece in the eurozone and that was reflected in market rates.”

The yield on the 10-year German bond ended yesterday at 0.86%, not significantly higher than the 0.50% at the start of the year, though up sharply from its all-time low of 0.05% in April when the ECB had started its huge programme of bond buying on secondary markets.

The cost of borrowing for the Irish State over 10 years yesterday ended at 1.61%, up from 1.2% at the start of the year, after trading as low as 0.61% in April amid the ECB bond-purchases.

Portugal’s 10-year yield, which had started the year at 2.5%, yesterday traded at 2.77% after its cost of borrowing hit 1.57% in April.

Analysts were also watching for a decision by the ECB on the amount of emergency liquidity assistance it will provide to Greek banks. Rumours swirled yesterday it may increase the ELA, but it may hold off until Thursday when it next meets.

Market participants however said that long-term questions remain about whether Greece can implement the new bailout programme for three years, and regain access to debt markets thereafter.

Greece’s 10-year bond, which at the start of the year was at 9.25%, traded at 12% yesterday, little changed over the weekend.

“That’s a long way from gaining access to markets,” Mr McGrath said.

Meanwhile, stock markets were cheered by the deal.

After a weekend of wrangling over proposed reforms and expressing a lack of trust in the Greek government, the agreement sent the Stoxx Europe 600 Index up 2%. That was its best two-day gain since 2011, after Greece offered to meet most of its creditors’ demands in exchange for fresh bailout.

“Ultimately we got the deal that allows the market to continue the relief rally, which still has a bit more to go,” said Allan von Mehren, chief analyst at Danske Bank in Copenhagen.

“A lot of investors have been sidelined for a while now because of the uncertainty. There will be quite a lot of money parked in cash that’s now ready to be put to work.”

Uncertainty over Greece’s fate had hamstrung investors for months, with more than half of Europe’s national stock gauges entering a correction last week and equity swings near levels not seen in three years.

Additional reporting by Bloomberg