LONDON: German Bund yields dipped on Tuesday as financial markets remained wary of the hurdles Greece needs to clear to receive vital financial aid from the euro zone.
The terms of the deal obliged leftist Prime Minister Alexis Tsipras to abandon promises of ending austerity and could split his government.
The parliament in Athens must ratify the reforms by Wednesday.
Tsipras faces a showdown with rebels in his own party furious at his capitulation to German demands for one of the most sweeping austerity packages ever demanded of a euro zone government. Investors worry that he might struggle to win the support needed to rush through the legislation and even if he succeeds, many doubt he will stay the course on a three-year programme.
"The agreement does not mean that Greece is out of the woods as it includes many potential pitfalls in terms of implicit and explicit austerity requirements, which will test the resolve of the Greek political system," distressed debt brokerage Exotix senior economist, Jakob Christensen, said.
Ten-year German Bund yields fell 1 basis point to 0.86 percent.
Italian and Spanish 10-year yields rose 1-2 basis points to 2.17 percent and 2.13 percent, respectively. Portuguese yields rose 3 bps to 2.82 percent.
Keeping downward pressure on yields, oil prices - closely linked with the inflation outlook in the euro zone - tumbled after Iran and six global powers reached a landmark nuclear deal that would see an easing of sanctions against Tehran and a gradual increase in its oil exports.
A measure of the market's long-term inflation expectations fell to 1.81 percent from 1.83 percent on Monday.
NEVER CERTAIN
Aberdeen Asset Management's head of pan-European fixed income, Neil Murray, said position-wise his fund remains flat to benchmark on Italy and Spain bonds, having reduced them from overweight a couple of weeks ago due to the uncertainty over Greece.
He will go back to an overweight position if the Greek parliament approves the measures.
"We are holding out until we see more certainty that they will kick the can down the road far enough by parliament accepting the proposals," he said. "We think it will go through, but you can never be certain in politics." The struggle after which European leaders and Greece reached a deal over the weekend was also a reason for concern.
The possibility of "Grexit" was openly discussed.
German Finance Minister Wolfgang Schaeuble suggested in discussions with other euro zone ministers that Greece could issue IOUs as a means of interim financing, German newspaper Handelsblatt cited participants as saying.
A Reuters poll showed the wider consensus for the likelihood of Grexit has dropped to 30 percent, significantly lower than last week's 55 percent.
Still, the risk is only back to where it was in mid-June.
"Markets may be a bit uncertain the deal will be finalised," KBC strategist, Piet Lammens, said.
"Even with a deal, over the longer-term the talks at the weekend are a bad thing for the euro zone. For the first time Grexit was on the table.
You cannot have a monetary union with a revolver at your head."
Comments
Comments are closed for this article.