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The Bond Column

Moving Past Greece
Updated: 2015-06-29, 08:55:52 ET
Analyst: David Kelland

Moving Past Greece
  • Greece has to pay the IMF 1.55 bln euro by the end of June (next Tuesday)
    • Greece and its official creditors have made progress on many issues this week and are said to be maybe 100 mln euro of VAT revenue away from an agreement
      • Any agreement will have to be approved by the Greek parliament, which may be a higher hurdle than the negotiations between the leadership of Syriza and the creditors
    • If the payment is not made, IMF Director Christine Lagarde technically has 1 month before she must report the arrears to the fund's executive board, but the IMF has said that she will notify the board immediately of nonpayment 
      • The IMF would make that statement whether it was true or not in order to prevent Greece from delaying further, so we do not know what she will do
      • Since all parties in the crisis negotiations are trying to avoid responsibility for a Greek exit, Lagarde would likely delay reporting the arrears if an agreement is in sight lest she be blamed for all of the fallout from a Greek default
    • Markets are complacent regarding the risk of contagion at this point, with the Spanish 10-year yield only 119 bps over the 10-year Bund and the Italian 10-year yield only 123 bps over the Bund yield. These are levels for those spreads that have prevailed for months
  • Whether a Greek deal gets done or not, the June Employment Situation Report will be released on Thursday, July 2nd (Friday is a holiday)
    • The 0.5% increase in hourly earnings in May put the economy on track to hit 2% inflation, the FOMC's target rate. Investors and traders will be watching to see if earnings growth continues in June
  • The Atlanta Fed's GDPNow model is forecasting a 2.1% seasonally adjusted annual growth rate for Q2 2015 after strong Personal Spending data was released this week
  • The 30-year Treasury bond yield hit a 9-month high of 3.255% today and the 10-year note yield came within a whisker of a 9-month high as well, topping out at 2.489%
    • The higher rates have helped financial stocks (which explains the divergence between the DJIA, S&P 500, and the Nasdaq Composite on Friday)
      • Because banks are in the business of maturity transformation (borrowing short and lending long), they benefit from a steeper yield curve
    • On the other hand, more speculative stocks were hit and the Shanghai Composite is almost in bear market territory, down 19% from its peak earlier in June