Greek yields near post-restructuring lows as lenders set to return

Tue Feb 18, 2014 4:51am EST

* International lenders to return to Greece this week

* Markets expect successful assessment of Greek reforms

* Falling yields, rising trading volumes are encouraging signs

* But inverted yield curve still suggests default fears

By Marius Zaharia

LONDON, Feb 18 (Reuters) - Greek bond yields on Tuesday hovered around their lowest levels since the country's debt restructuring as its international lenders said they will return to Athens this week to assess the delivery of economic reforms.

The lenders interrupted a visit last year due to a lack of progress in discussions with Greek authorities. Since then, Greece has shown significant improvement.

Its budget surplus for 2013 beat forecasts and its economy shrank less than the government or its lenders expected - achievements which should lead to the disbursement of a tranche held up since September, analysts said.

Greek 10-year yields dipped slightly to 7.56 percent, trading less than 10 basis points above their lowest levels since a March 2012 debt restructuring hit last week.

"It does appear that the economy is recovering from a very, very deep slump. We've seen a recovery in government finances as well ... so you could expect a positive (troika) review," said Elwin de Groot, market economist at Rabobank in Utrecht.

A spike in trading volumes and a tentative resurgence of debt insurance instruments represented further signs of healing in a market once at the mercy of so-called vulture funds reputed for seeking high returns in collapsed assets.

Volumes in the first five weeks of the year stood at about 546 million euros, about 36 percent of the turnover for the whole of 2013 and almost matching 2012's annual volume, Greek central bank data showed.

That indicated Greek bonds appealed to a broader group of investors than just domestic banks and high-risk hedge funds while volatile trading during this year's emerging market tensions suggested investors with mandates in the developing world were now holding some Greek bonds as well.

This year has also seen the re-appearance of prices of Greek credit default swaps, last quoted at roughly 490 basis points, although data provider Markit said CDS prices for the moment were just indicative. The market effectively collapsed after Greece restructured its debt.

Once CDS trading picks up, investors will be able to hedge their exposure to Greek bonds and may be more willing to hold them.

"It's all related to investors regaining interest in trading (Greek) bonds," ING rate strategist Alessandro Giansanti said.

WARNING SIGNS

There remained warning signs, however. Greek 10-year yields continued to trade above the 30-year ones - which usually occurs in distressed debt markets where investors price in a high risk of default.

This suggests that while investors have grown more optimistic on Greece's chances to rebound from one of the biggest debt defaults in history, they still fear that an accident could be just around the corner.

The ruling coalition in Greece has a narrow three-seat majority in parliament and a collapse might pave the way for anti-bailout party Syriza to come to power.

Analysts warn any more brinkmanship between Athens and its lenders might be a catalyst for further erosion within the coalition, especially with European Parliament elections looming.

International lenders currently rule out another debt restructuring in Greece, but analysts say all bets are off if Syriza come to power, with even the country's future in the euro zone in doubt.

"Investors still worry about another debt restructuring," ING's Giansanti said.

Using a model which compares bond prices with where they would be if they paid similar coupons to low risk German Bunds, he estimates the market sees a roughly one in three chance of default.

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