* Greek yields extend this week's falls
* Media report says EU weighing extending maturity of loans
* Germany sells 3.28 billion euro of 5-year debt
* Expectations of further ECB easing supports demand
By Emelia Sithole-Matarise
LONDON, Feb 5 Greek bond yields fell sharply on
Wednesday after a media report said European Union officials
were weighing extending the maturity of loans to Athens to 50
years, which could ease the debt burden on Greece.
Citing two officials with knowledge of the discussions,
Bloomberg said the next bailout for Greece may include extending
the maturity to 50 from 30 years, and cutting the interest rate
on some previous aid.
An official close to Greece's debt negotiations with the
troika had told Reuters as early as October that Greece may swap
a big chunk of its bailout loans with a 50-year government bond
as a way to achieve debt relief once it attains a primary budget
surplus this year.
Given that a cut of Greece's nominal debt pile is not an
option, Greek and European Union officials have repeatedly said
that some combination of at least three measures were examined
to provide debt relief. These were a further lowering of
interest rates on existing loans, an extension of the maturities
and pay-back schedule, and some relief on financing EU
Greek 10-year yields slid 29 basis points to
8.12 percent with 30-year yields falling 24 bps to 7.82 percent
, outpacing other euro zone peers including bonds
issued by bailed-out neighbour Portugal.
The yields have dropped around 60 basis points this week,
almost reversing their recent rise to 2014 peaks spurred by
contagion to the euro zone's most battered debt market from the
sell-off in emerging markets.
There has been a string of positive news on Greece,
including a Reuters report on Tuesday that Athens and its
international lenders had largely resolved differences over a
potential fiscal gap this year, removing a hurdle to talks to
release more bailout funds.
"Today's news is positive in terms of the Bloomberg report
that the EU are considering reducing interest rates on the loans
and moving forward with the programme," said Gabriel Sterne,
chief economist at distressed debt brokerage Exotix.
"There are a lot of overhanging uncertainties the resolution
of which will be of considerable comfort to markets, especially
in an environment where the opinion polls are not looking good
for the government. It is reasonable that markets are handing on
to this sort of news and are very volatile."
Sterne was referring to signs of increasing opposition to
austerity measures in Greece, where the ruling coalition has a
three-seat majority in parliament. The opposition Syriza party,
leading in the polls, has pledged to tear up the bailout deal.
In core euro zone markets, German yields fell back to
six-month lows after a sale of five-year bonds drew solid demand
fuelled by bets the European Central Bank will signal further
monetary policy easing this week.
The sale of 3.28 billion euros of five-year bonds drew bids
worth 1.7 times the amount offered and was sold at a lower yield
than at a similar auction in January.
Lingering concerns over emerging markets and the ECB policy
outlook is supporting demand for German debt, the euro zone's
safe-haven of choice, even though yields in the secondary market
are at six-month lows.
"Clearly the ECB is in play. A number of people think there
will be a refi cut (on Thursday) and we are one of them.
Certainly the prevailing consensus is you are going to get more
easing in the next couple of months," said RBS strategist
Five-year German yields were 2 basis points lower at 0.53
percent after the auction while the 10-year Bund
yield was 3.4 bps down at 1.521 percent.
"Secondly, there are still some flows from emerging markets
into safe haven markets (and) the data backdrop is not as strong
as the consensus probably believes."
A fall in euro zone inflation to 0.7 percent last month,
well below the ECB's target, and volatile money markets are
piling pressure on the ECB to do more to pep up the block's weak
Money market prices suggest no change in ECB rates at its
policy meeting on Thursday. The vast majority of 24 traders
polled by Reuters said they did not expect the ECB to take its
refinancing rate lower than the current 0.25 percent on Thursday
or make any moves that could increase money supply and boost