Greek bonds rally as German election draws near

Fri Sep 20, 2013 4:50pm IST

By Marius Zaharia

(Reuters) - Greek government bonds rallied on Friday as an election campaign in European paymaster Germany neared its end with little clarity about what it might mean for Greece's future in the euro zone.

Funding gaps facing Athens and the risk Portugal may not return to markets when its bailout runs out next year will be among European policy challenges for Germany's next government.

But as Greek yields fell to one-month lows, Portugal's held steady, suggesting investors were cautious about betting the German vote could lift the two countries out of their crisis.

Both Greek and Portuguese bonds, along with other lower-rated euro zone debt, rallied on Thursday after the Federal Reserve unexpectedly kept its monetary stimulus unchanged.

Greek bonds also benefited from a first quarterly drop in almost four years in Greece's unemployment rate.

"Greek bonds are rallying because of a combination of things: first, the (lack of) Fed tapering; second, more good data; and only third, the absence of any nasties in the German election campaign," said Gabriel Sterne, an economist at distressed debt brokerage Exotix.

For investors, the most significant headline on Greece during the campaign was Finance Minister Wolfgang Schaeuble's comments that Athens might need more money, but that there would not be any more haircuts on its debt. The remarks caused a minor sell-off but had no lasting impact.

Greek 10-year yields fell 23 basis points to 9.964 percent, while Portuguese yields rose 1 bp to 7.24 percent.

VOTE SCENARIOS

Speculation Chancellor Angel Merkel's centre-right coalition may not win a majority on Sunday may also have had a limited impact on Greek bonds, some analysts said.

In such a scenario, Merkel is likely to try to form a grand coalition with the Social Democrats, seen as more open to European integration and liability-sharing than she is.

"A grand coalition could be seen as a short-term positive element," said Gianluca Ziglio, executive director of fixed income research at Sunrise Brokers.

Rabobank rate strategist Richard McGuire said that in either of the two main scenarios, the market impact could be limited.

"It doesn't matter near term because neither of the governments would push for further European integration (in the beginning)," Rabobank rate strategist Richard McGuire said.

"The crisis needs to get worse before it gets better. It will be market pressure that will lead to a decision to share liabilities. The difference is only how far the tensions would have to rise in either of the two scenarios for that to happen."

German Bunds were stable on Friday, taking a breather after a sharp Thursday rally.

Ten-year yields were flat at 1.88 percent, having hit one-month lows of 1.812 percent on Thursday. That compares with 1-1/2 year highs of 2.059 percent hit earlier this month when Fed tapering expectations were most intense.

Bund futures rose 17 ticks to 138.73.

"I suppose December is the market view (for the Fed starting to trim stimulus), but we'll look at every piece of data between now and then and take it from there, although the Fed have made themselves pretty hard to read," one trader said