Greek spread tighter after ECB says to buy bonds

LONDON May 10 (Reuters) - The premium investors demand to hold Greek government bonds plummeted by nearly 600 basis points on Monday and the cost of insuring against a Greek default fell after the European Central Bank said it would buy government bonds as part of a larger rescue deal.

The ECB declined to comment on speculation that it had already started purchasing government bonds. [ID:nWEA1233]

"The ECB said they were going to come up and buy bonds. The market reaction seems to be that they are speculating these bond buys are going to take place or are taking place, so spreads have narrowed dramatically," said a trader.

The premium investors demand to hold 10-year Greek government bonds rather than euro zone benchmark German Bunds fell by nearly 600 bps to 464 bps basis points, from 1,047 bps at the European settlement close on Friday GR10YT=TWEB DE10YT=TWEB.

The spread was at its narrowest since April 20.

Five-year credit default swaps (CDS) on Greek government debt fell to 657 bps, down from 915.5 bps according to CDS monitor CMA DataVision.

The cost of insuring Portuguese, Spanish and Italian bonds also fell, and bond yield spreads against Bunds tightened across the euro zone periphery.

(Reporting by London markets team)