Greek market return, Fed minutes spur periphery debt rally

Thu Apr 10, 2014 8:51am EDT

* Investors snap up new Greek 5-year bond at 4.95 pct yield

* Greece returns to market at lower cost than Ireland

* Greek yields pinned below 6 percent after sale

* Rest of euro zone market firmer after dovish Fed minutes (Updates with Greece selling 3 billion euros of bonds, fresh comments)

By Emelia Sithole-Matarise

LONDON, April 10 (Reuters) - Greece's robust return to bond markets on Thursday two years after it defaulted buoyed investor appetite for lower-rated euro zone bonds, driving their borrowing costs back towards multi-year lows.

Belief that a rate hike by the U.S. Federal Reserve might not come as soon as some had feared also gave fresh legs to the relentless rally in euro zone debt, which were once at the forefront of the sovereign debt crisis.

A car bomb in central Athens failed to rattle the market, with investors hunting for higher returns in an environment of low interest rates also snapping up bonds across the credit spectrum in the euro zone.

Ireland sold 1 billion euros of 10-year debt at a record low 2.90 percent yield at its second regular auction on Thursday since exiting its international bailout in December.

Greece sold 3 billion euros of a new five-year bond via a syndicate of banks, the fastest return to market of a defaulted sovereign.

The bond, which drew bids of over 20 billion euros, was offered at a cost of 4.95 percent, sources close to the deal told IFR, a Thomson Reuters service. This is one percentage point less than the 5.90 percent yield at which Ireland, the first country to come back to market, sold its five-year bond in July 2012, but slightly below the 4.90 percent cost for Portugal's sale of similar maturity paper in early 2013.

"Its a great success for Greece ... and now they have tangible evidence they can fund themselves in the market,' said Michael Leister, a rates strategist at Commerzbank.

"It also bodes well for the periphery in particular for Portugal which is likely to use this tailwind to probably go ahead with a bond auction. This is still simply a reflection of central bank policy and that liquidity is ample."

Greek 10-year yields rose 4 basis points to 5.96 percent as the market prepared to absorb the new bonds, but they remained below the 6 percent level they breached on Wednesday for the first time since early 2010.

The bonds still offer the highest yield in the currency bloc, despite toppling from the debt crisis peaks of over 30 percent, luring investors keen to score higher returns in a low interest rate environment.

TOO EARLY FOR SOME

Questions remain, with the country's sub-investment grade credit rating sidelining many investors.

"For more flexible accounts this may be an attractive prospect," said Martin Harvey, a European bond manger at Threadneedle Investments. "However, the low credit rating and questionable long-term fundamentals will still prohibit more conservative accounts from involvement."

Yields on investment rated 10-year bonds issued by Ireland, were 5 bps down on the day at 2.91 percent after its bond sale, with Portuguese equivalents 3 bps lower at 3.90 percent . Portugal aims to auction bonds in the first half of this year to cement its planned exit in May from its international aid programme.

Spanish and Italian equivalents were also 3 bps lower at 3.18 and 3.17 percent respectively.

"Greece being able to go to financial markets with an oversubscribed deal with yields lower than expected makes us more confident that there's less risk of a default by an EU sovereign," said Aliki Papasteriou, investment analyst at Nedgroup Investments.

"That tail risk is much (smaller) and it makes us more willing to invest in funds that have exposure to peripheral risk. But it is early days to recommend getting into Greece." (Additional reporting by Marius Zaharia)

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