Azernews.Az

By Bloomberg

In the past month, Greece’s two-year note yields have tumbled about 40 percentage points as the nation swung from being on the brink of an exit from the euro area to now being a day away from securing a third bailout deal.

The government is seeking to conclude talks on a rescue program by Tuesday, in time to make a payment to the European Central Bank later in August. Even so, with short-term yields at about 20 percent and an inverted yield curve -- whereby longer- maturity bonds yield less -- investors still are pricing in signs of stress and a probability of default.

“The two-year Greek government bond is back to the mid- March level of yield, which still shows there is significant levels of distress in the market,” said Peter Chatwell, a rates strategist at Mizuho International Plc in London. “If the reforms have a credible chance of being implemented and if Greece’s existing private-sector debt can continue to be serviced then there is still significant room for the GGBs to rally from here.”

Greece’s two-year yield fell to 19.80 percent as of 12:52 p.m. in London. The 3.375 percent note due in July 2017 was at 75.585 percent of face value. That price compares with a low of 42.78 on July 8 and 99.65 when the debt was sold last year.

New Bailout

“A two-year bond trading at 76 euros still has a lot of default probability baked into the price, and we do not yet have enough details on what the new bailout will look like to yet appraise the likelihood of its success or failure,” Mizuho’s Chatwell said.

In the midst of Greece’s debt negotiations, when tensions were highest, the Bank of Greece halted dealing of government bonds on its electronic trading platform. With few bond sales, the movements in quoted prices have been deemed more as a gauge of sentiment toward the nation’s debt sustainability.

The four institutions representing Greece’s creditors made progress over the weekend on the details of economic reforms that would make as much as 86 billion euros ($93 billion) available to Greece, according to three people with knowledge of the discussions.

The issue of debt relief and how to make the nation’s debt more sustainable still remains unsolved. The most likely outcome would be a combination of interest-free grace periods, maturity extensions and reduced interest rates that would trim servicing costs to a more manageable level, according to David Powell, an economist for Bloomberg in London.

Bond Returns

As tension over Greece’s place in the currency union eased, the nation’s debt has intermittently posted positive returns.

Returns on Greek bonds were positive last week for the first time since the middle of July, according to the Bloomberg Greece Sovereign Bond Index. This year, the securities have lost 7.4 percent through Aug. 7. That compares to the average euro- area return of 0.7 percent, according to Bloomberg World Bond Indexes.

“There are still very big questions about Greece’s long- term future within the eurozone, and even the ability of this ‘deal’ to get us more than 6 months further down the line,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “Grexit will still be in the background for years to come. But it’s still a big positive to get Greece out of the way for even the rest of 2015.”