Final round in the Greek poker game

The Greek crisis remains in the centre of attention even on the bund market. A pronounced 'risk-off' sentiment is suggested by latest price moves in Bunds. After all, the Bund future had reached the highest level since early June and two-year Bund swap spreads even climbed to a two-year high

However, the increase in peripheral yield pick-ups has been fairly minor in relation to the renewed escalation, while - in absolute terms - yields even dropped again, and are currently trading only slightly higher than before the Greek referendum announcement just under two weeks ago.

European bond markets are currently supported by investors' massive reinvestment needs. After all, more than €100bn in coupon and redemption payments will fall due this month. The resulting price effect should be amplified by overall thin liquidity on bond markets.

Moreover, the recent drop in oil prices has dampened the rise in inflation expectations. After all, above-expectation inflation data had been a major driver behind the Bund sell-off in May and June. For now, falling oil prices have soothed the market's fears of a lasting spike in inflation.

This is also evident from the significant drop in the break-even rate of the new thirty-year inflation-linked Bund. Finally, concerns regarding Chinese equity markets are also providing tailwinds to bond markets.

"These patterns are expected to largely continue next week", says Commerzbank. 

Bunds, in particular, should be well supported as uncertainty surrounding the further fate of Greece is also likely to remain after Sunday's EU summit. Yet, the market appears more optimistic about a deal than the representatives of the creditor governments.