Peripheral yields rise but euro holds steady

Yields on peripheral euro zone government debt were rising even as the euro showed signs of resilience after the Greek people voted firmly against a proposed deal offered by the country’s creditors.

While the euro halved overnight losses after the resignation of Greece’s combative finance minister, the country’s anti-austerity government now holds a direct mandate to seek deeper concessions than those offered by its creditors at the last round of talks.

Market turbulence remains likely over the coming days as investors wait to see whether the vote against austerity measures will result in Greece leaving the euro. There is growing concern among market participants and observers that it might not be as easy to sustain a sense of calm.

“The enlarged chances of a Greek exit from the euro after the vote means that the European Central Bank is likely to take more risks, and that leaves the euro facing further pressure,” said Koon Chow, macroeconomics and foreign exchange strategist at the Geneva-based Union Bancaire Privée.

Trading in the single currency has been choppy. After dropping to $1.0967 on Monday, the euro bounced up to $1.10520 following the news of Yanis Varoufakis’s resignation, which is seen as positive for the renewed talks between Greece and its creditors. It has since resumed course toward session lows, standing down 0.7 per cent on the day at $1.1030.

The yield on 10-year Spanish sovereign debt rose 12 basis points to 2.346 per cent, while the yield on Portugal’s equivalent paper was up 11bp at 3.056 per cent. Italian 10-year debt yields were higher by 12 basis points at 2.373 per cent.

Irish debt yields also rose with the 10-year bond, closing fractionally above 1.6 per cent, up just under four basis points.

German haven

As investors cut their exposure to debt issued by Spain, Portugal and Italy, the haven appeal of German sovereign bonds attracted buyers, opening up the spread between 10-year Bunds – on which yields are down 7 basis points at 0.73 per cent – and equivalent paper issued by other euro zone nations.

The yield spread is seen as providing a key insight into the extent of the strain now being felt within the European financial system.

Financial stocks led losses on European stock markets, but the overall pace of selling on the region’s main indices was not as steep as pre-market calls suggested. Athens’ stock market remained closed.

The international FTSE Eurofirst 300 fell 1.2 per cent to 1,499.47, with banks prominent on the list of its biggest fallers. UniCredit, the Italian lender, led the sector lower, with its shares down 3.6 per cent. – (Copyright the Financial Times Limited 2015)