Bonds up as Greece plans vote on loans, austerity

Greece, the birthplace of democracy, said it would hold a referendum on a new aid package from the European Union, asking voters to decide on whether they wanted to adopt the drastic spending cuts required to get its next set of rescue loans from the euro zone and the International Monetary Fund.

The possibility that Greek voters could vote down the euro zone's rescue plan raised the specter of a Greek default and a financial market panic that could undermine investors' faith in the debt of other European countries.

Volatile and skittish markets reacted accordingly.

A bid for safe-haven US debt pushed benchmark 10-year Treasury notes up more than 1 point and drove their yields below 2 percent to 1.99 percent from 2.11 percent on Monday.

"Greece," said John Canavan, market analyst at Stone & McCarthy Research Associates in Princeton, New Jersey. "It's a return of the safe-haven bid after Greece's decision to hold a referendum took everyone by surprise."

"A great deal of work was done last week at the European summit to stave off a Greek default," Canavan said. "Putting (the rescue package) up for referendum raises the risk that it was all for naught.

"If the Greeks shoot it down, then Greece will be forced to default with a further risk that they could be forced out of the euro," Canavan said. "That would be bad for everyone and, therefore, good for Treasuries as people seek safety."

In Europe, German bund futures, another safe-haven asset, rallied as yields on bonds issued by peripheral issuers, including Italy, rose after senior members of Greece's ruling party called on Prime Minister George Papandreou to resign.

On Wall Street, the three major US stock indexes fell more than 2 percent.

"The sharp increase in European peripheral debt yields on fears of a Greek default and the broader fears engendered by that also caused investors to flee equity markets for the safety of US debt," Canavan said.

Thirty-year Treasury bonds rose 3 points in price, pushing their yields below 3 percent to 2.99 percent from 3.13 percent late Monday.

A two-day Federal Reserve policy meeting began on Tuesday, with Fed officials worried about the US economy's health and looking at ways to offer more monetary stimulus -- including helping the distressed housing market.

The Institute for Supply Management (ISM) said its manufacturing index read 50.8 in October. Economists polled by Reuters had expected a reading of 52.0. Readings above 50 reflect expansion in the manufacturing sector.

Copyright Reuters, 2011