Greek bond yields hit 1-year low on deal with lenders

Greek bond yields hit their lowest in more than a year and banking stocks rose about 10 per cent on Tuesday after the country's finance minister said Athens had reached an agreement with its lenders on financial reforms.

The yield curve was disinverted in a sign of easing fears of another restructuring of privately-held government debt. Ten-year yields fell closer to 7 per cent, a level with psychological significance in the euro zone as several countries were forced to seek bailouts after their borrowing costs surged above it.

The agreement removed a major obstacle holding up fresh loans under a third, €86 billion bailout programme for Greece.

Finance Minister Euclid Tsakalotos said the deal meant Greece’s parliament could now ratify the set of reforms to law, and that deputy euro zone finance ministers, known as the Euro Working Group, would on Friday endorse the deal.

That would allow a €2 billion aid disbursement and about €10 billion in recapitalisation aid to the country’s four main banks.

“Greece is believed to have reached agreement with the Troika and could therefore receive the next tranche as early as at the end of the week,’’ said Alexander Aldinger, senior analyst at Bayerische Landesbank. “This will probably contribute to a spread tightening in the periphery.’’

Greek 10-year yields fell to 7.11 per cent, their lowest since October 2014. They are about a third what they were in July, when the bailout negotiations between the government and its euro zone partners reached a critical point and many feared Athens would be forced to leave the bloc.

Two-year yields were down 36 bps at 6.24 per cent, having reached almost 60 percent in July. Two-year yields have traded above 10-year yields for most of 2015, a phenomenon common in countries seen to be close to default.

Greece has been keen to complete its first assessment of the bailout package so it can start talks with the European Union and the International Monetary Fund on debt relief.

European Central Bank Governing Council member Ewald Nowotny had said on Monday a solution was being found between the EU and the IMF to reduce the debt burden on Greece by extending maturities and reducing interest rates.

Greek stocks were up 3.8 per cent, with a banking index up 10.3 per cent.

Most euro zone bond yields were 1-2 basis points lower after European Central Bank chief economist Peter Praet said inflation expectations were still fragile and downside risks may have increased in light of the attacks in Paris.

German 10-year Bund yields, the benchmark for the euro zone borrowing costs, fell 1 basis point to 0.52 per cent.

COMMENT NOW