* International lenders to return to Greece this week
* Markets expect successful assessment of Greek reforms
* Falling yields, rising trading volumes seen encouraging
* Inverted yield curve still suggests default fears
By Marius Zaharia
LONDON, Feb 18 Greek bond yields hovered on
Tuesday around their lowest since the country's debt was
restructured, with its international lenders set to return to
Athens this week to resume bailout talks.
The "troika" of the International Monetary Fund, the
European Commission and the European Central Bank interrupted a
visit last year due to a lack of progress in discussions with
Greek authorities. Since then, the Greek economy has shown signs
of 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 loans held
up since September, analysts said.
Sources directly involved in the talks told Reuters earlier
this month that differences over plugging a 1 billion euro
funding gap for this year had largely been bridged.
Greek 10-year yields last stood at 7.58 percent,
about 10 basis points above their lowest levels since a March
2012 debt restructuring, which were hit last week.
"Greece has made progress ... with the attainment of a
primary surplus and early signs of stabilisation in the
economy," said Dennis Shen, economic associate at
A spike in trading volumes in Greek bonds 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
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 a broader group of investors than just
domestic banks and high-risk hedge funds were interested in
Greek bonds while volatile trading during this year's emerging
market tensions suggested investors with mandates in the
developing world were holding some Greek bonds as well.
"Some of the real money has gone in there on the back of the
European recovery story - lots from New York, London and
Europe," said Gabriel Sterne, economist at distressed debt
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 they were for the moment
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, analysts said.
"It's all related to investors regaining interest in trading
(Greek) bonds," ING rate strategist Alessandro Giansanti said.
There remained warning signs, however. Greek 10-year yields
are still higher than those on 30-year bonds - an
inversion that usually occurs in distressed debt markets when
investors price in a high risk of default.
This suggests that despite the improved outlook, some
investors still fear they may not be fully repaid.
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 could further erode the coalition, especially with
European Parliament elections looming.
Senior European officials have ruled out another debt
restructuring in Greece, but analysts say all bets are off if
Syriza - ahead in polls - comes to power.
"The main risk in Greece is political," said Shen at
Greek 30-year yields fell 4 bps to 7.23 percent.
By comparing bond prices with where they would be if they
paid similar coupons to low risk German Bunds, ING estimates
the market sees a roughly one in three chance of default.
Markit's standard calculations based on CDS spreads show a
similar default probability.
"Clearly the yield curve and the absolute level of yield
would imply an elevated risk of default," said Sohail Malik,
lead portfolio manager for the ECM Special Situations hedge
fund, which has exited the market after the sharp drop in