Bonds: Athens raids local government coffers, Greek yield curve steepens

LONDON (ShareCast) - These were the movements in the most widely followed 10-year sovereign bond yields: US: 1.89% (+2bp) UK: 1.58% (-1bp) Germany: 0.08% (+0bp) France: 0.36% (-1bp) Spain: 1.47% (-1bp) Italy: 1.45% (-5bp) Portugal: 2.04% (+4bp) Japan: 0.31% (+0bp) Greece: 13.33% (+40bp) Yields on Italian and Spanish longer term sovereign debt fell even as the Greek yield curve continued to steepen, signalling trouble ahead, as investors braved the rough waters after encouraging remarks from European Central Bank president Mario Draghi over the weekend.

Greek three-year government bond yields jumped 183 basis points to 28.58% while the 10-year yield finished at 13.33%.

Speaking from the sidelines of the International Monetary Fund´s sping meeting in Washington DC, on Saturday (Shenzhen: 002291.SZ - news) , Draghi warned investors not to bet againt the single currency.

That comes as the clock continues to run down for Athens to convince its international creditors that it is serious on undertaking the economic reforms necessary to unlock further aid.

However, analysts and even Eurozone officials are increasingly wary of the prospect that the Greek government will take its brinksmanship to the limit, either by defaulting on debt payments - even if only temporarily - or by risking a referendum on the country´s continued membership of the euro and commitment to the terms of the existing bailout.

In the afternoon Athens announced it would force local government to transfer their cash and term deposit balances to their accounts at the central bank. The move might net Athens access to approximately €2bn in liquidity.

Stateside, the president of the Federal Reserve bank of New York, William Dudley, said the economic data will determine when the central bank first raises rates, "hopefully" later this year.

However, he added that "we have to see what unfolds." He also sounded a word of caution on the impact an interest rate hike would have on emerging markets, although many of them are now in a better condition to cope.

Commenting on the prospects for the US economy, in the evening Capital Economics issued a research note in which it argued that "with broad money growth [in the US] running at close to 6% over the past year and bank loans doing so at even faster pace of 8%, there is little evidence of a sustained slowdown in real economic growth or price inflation." Acting as a backdrop, over the weekend the People´s Bank of China (HKSE: 3988-OL.HK - news) lowered its reserve requirement ratio (RRR) for large financial institutions by 100bp and for small/medium-sized ones by twice that amount, to 18.5% and 16.5%, respectively.

In reaction to the new policy moves in China economists at Morgan Stanley (Xetra: 885836 - news) wrote: "we maintain our view that policymakers will step up their policy intervention in monetary, fiscal and property areas to boost growth and create more room for structural reforms." Given that the reduction in the RRR was greater than envisaged, the broker maintained its forecast for PBoC to cut policy rates two more times, albeit perhaps "more spread out in coming months in Q2 and Q3."