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Growing treasury support due to Greek deadlock

We see increasing support for treasuries in current investor behaviour. Investor confidence continues to decline, short and medium term momentum is building and flows remain supportive.

In the past weeks we have witnessed a decline in risk appetite on the back of renewed sovereign stress in the Eurozone. The latter is very much subject to a self-fulfilling dynamic and it is not clear at what point and how policymakers will respond to this. It seems that at least until mid June, when new elections in Greece will be held, markets will have to cope with increased uncertainty. For us this is reason enough to take a cautious positioning and to be bullish on (non-peripheral) treasuries.

Sovereign stress has flared up again

Recent developments have made clear that Europe will need to brace itself for another game of chicken between policymakers in the North and politicians in Greece. The stakes are very high in this policy game - so high for both players involved (anarchy in Greece, social unrest, bank runs and capital flight in other parts of Southern Europe) that a policy compromise seems a rational outcome of this game after the dust of the next Greek elections has settled.

This does suggest that some pundits might be over-estimating the likelihood of a near-term exit from Greece out of the Eurozone. At the same time, this crisis has long passed the stage were rational expectations provide the best guidance for assessing future outcomes of these policy games. Therefore, it has to be acknowledged that a less cooperative equilibrium could be reached on the back of emotional or populist policy decisions. Both the social and economic implications of such an outcome (Greek default with or without a euro exit) and the probability of such an outcome are very difficult to assess.

From an investment perspective, a more uncertain future with stronger downward risk tilts around it has emerged. For our positioning in fixed income markets this does not mean we want to position on a Greek exit scenario, but it does result in a more cautious stance in spread products and a more bullish view of treasuries (outside of the periphery) as we can no longer exclude this scenario either and anticipate significant implications if it materialises.

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