Why Greece Matters For U.S. Rates

Some argue that Greece doesn’t matter in the grand scheme of European debt, but U.S. rate data for the past 13 months suggests that they’re wrong.

On May 6, 2010, Greek parliament ratified austerity measures to increase taxes and reduce incomes for public employees which account for about 20% of Greece’s workforce.

Rioting ensued and the U.S. markets reacted with a stock crash and massive bond rally that pushed rates down .375% (from 5.25% on Friday, April 30 to 4.875% on Friday, May 8).

That rate decline continued throughout last summer on worries of a broader European debt crisis.

Rates averaged 4.35% in September 2010, and while this was not solely due to European debt problems, it was a primary market theme driving investors into U.S. mortgage and Treasury bonds.

Rates reached their low of 4.125% on October 9, 2010, eight days after NY Fed president William Dudley’s October 1 speech hinting strongly at QE2. And for the sake of today’s argument—that Greece does in fact matter when it comes to U.S. rates—we’ll leave that part out.

Even excluding that, rates dropped almost 1%—from 5.25% to 4.35%—last summer on European debt issues triggered by Greece.

An event similar to May 6 happened again in Greece last week, and again the result was lower U.S. rates.

And tonight is another Greece vote on whether to continue with budget cuts, and next Tuesday, June 28 will be a vote on the new budget. [UPDATE: results of 6/21 vote]

It’s political theater when politicians bicker, but markets react when citizens take to the streets in the tens-of-thousands (remember: sophisticated unions organize these demonstrations) to protest austerity measures.

Even if some argue that 13 months is short term, U.S. bond markets have still rallied, driving rates down, and it’s hard to argue against Greece being an important catalyst for the U.S.’s sustained low rate environment.