Greece Ignites Flight to Safety in U.S. Treasuries
Investors are jumping into the safe-haven of U.S. Treasury bonds amid growing uncertainty over the debt crisis in Greece.
The flight to safety pushed the yield on the benchmark 10-year Treasury note lower to 2.37% in recent trading Monday. Bond yields fall when prices rise.
The yield touched a low of 2.297% compared to Friday’s mark of 2.48%, the highest closing yield in roughly nine months.
“It’s common to see a flight to quality when there are questions about market events” such as the debt negotiations in Greece, said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott. “We can expect to get a lot more news about the referendum next weekend, so we could see more buying after that.”
As Treasuries rallied, stocks fell Monday with Greece moving to the brink of default and an exit from the eurozone—a potential scenario dubbed “Grexit.”
Greek officials and the nation’s creditors failed to reach a last-minute debt deal over the weekend. Instead, Greek Prime Minister Alex Tsipras surprisingly announced that a proposal from the nation’s creditors, which includes pension cuts and tax hikes, would be put to a national vote on July 5.
In the meantime, banks across Greece and the nation’s stock market were closed.
Michael Block, chief strategist at Rhino Trading Partners, noted that Monday’s flight to safety was “exacerbated by the fact that consensus was long stocks, short fixed income, and amidst tumult such as this, consensus gets torn asunder and unwound.”
While U.S. Treasury bonds rallied, government debt in other troubled European economies like Portugal, Italy and Spain were in the middle of a selloff. Traders appeared concerned that Greece’s struggles could spread across the region.
Stronger economies in Europe, including Germany and the U.K., saw bond prices move higher.
In 2012, the last time Greece sparked global jitters, markets experienced an even bigger jolt. LeBas said a disruption to short-term funding markets, which occurred during the last Greek crisis, would be the “severe-case scenario.” But that possibility is still days or weeks away, if it happens at all, he added.
Greece’s existing bailout expires Tuesday, June 30, according to European officials, so all eyes will be fixated on the upcoming referendum.
“If this is resolved, I would expect bonds to pull back,” Block said, “but in the intermediate term, I see bonds outperforming and settling in at lower yields as the Fed is not going to rush to raise rates amidst all this unease.”