MBS Day Ahead: Passing the Time Until Greece's Big Day

It's a big day for Greece. 

No, not today, when the country will 'default' on it's €1.7 bln payment to the IMF.  No, not July 5th when the Greek people will vote for a European reform package that's no longer on the table (rumor is it'll have to be conducted more slowly due to funding anyway).  Rather, the big day is July 20th, when Greece owes its first real debt this month.

Assuming the payment to the IMF is missed, there's no major consequence in the near term.  Greece simply owes the IMF.  Even ratings agencies commented today that it would not be classified as a true default.  What we don't know at the moment is how the ECB will handle Greece's emergency liquidity assistance (ELA).  This is Greece's allowance, for all intents and purposes.  If something can be worked out that keeps the allowance flowing through July 20th, Greece will then need to pay the ECB €3.5 bln. 

Why in the world would they do such a thing?  Based on today's revelations, missing a payment to the ECB wouldn't be a technical default either.  The biggest risk is that ECB cuts off Greece's allowance.  In that case, Greece could simply pay the ECB (if it could) and presumably reinstate ELA.  But the potential reward for bluffing is that the whole world will get to see how badly Europe really wants Greece to remain in the Eurozone (or not?).  Reason being, if the deadline passes without a deal, it opens the door for the ECB to be more conciliatory (or not?).  If they're not, THAT'S when the real Greek drama starts.

There are quite a few days between now and then.  While we can surely count on the Greece situation to deliver some market volatility, it's not a big-picture source of momentum until something substantial actually happens.  I know it looked like it did yesterday, but don't be surprised if it ends up looking like a one-off 'perfect storm' type day, in hindsight.  In order for bond markets (the big ones that count) to truly be doing something interesting, we'd need to see Germany and the US break back into May's trading range.  They've pecked at it here and there, but in general, the inflection zone between May and June yields remains intact as resistance, even after yesterday.

Pretty sure we have an NFP coming up on Thursday.  That seems like something that could solidify a bounce or incite a break of this inflection zone (2.26-2.31% in 10yr yields).