Euro area supply/demand outlook to support market over next few weeks

Less number of activities are found this week in the euro area. Greece made payments to the IMF and the ECB on Monday and passed the reform bill in the parliament on Wednesday. Formal negotiations for the third bailout should start very soon. The Financial Times reported that the new bailout is expected to be agreed in August, potentially ahead of the ECB redemptions on 20 August (€3.1bn). 

According to Barclays, "If the negotiations are not finalised by then, a new bridge financing will have to be arranged, likely similar to the most recent €7bn EFSM financing. The bottom line is that developments in Greece are unlikely to be market-moving in nature over the coming weeks absent an unexpected break-up of the talks."

Elsewhere, BoE July minutes released this week were somewhat hawkish with some members not voting for a hike just because of the Greek uncertainty, which is largely reduced in the short term at the least. On the week, risky assets were down slightly and commodities remained weak, which helped the rates market rally in a broadly quiet data week. 10y Bunds, Treasuries and Gilts yields have all fallen by about 5bp. 

Barclays states, "Redemption and coupon payments will remain notable in Spain, France and Italy in the coming weeks as well. Lastly, given that the ECB's frontloading was much less than market expectations in May and June (c.€6bn in total), the ECB will maintain a decent pace of purchases until the end of August in an illiquid market that should also support duration at the margin."

The supply/demand outlook remains market-friendly for the EGB market in August (especially in France and Italy), is less attractive in September and becomes more constructive again from October onwards. In addition, market attention might again turn towards any potential ECB frontloading of QE in the latter part of October and November, ahead of the illiquid trading in December, which can help EGB market performance during the October/November period.