(Recasts with detail on investor interest in bond, updates prices)
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, April 9 Greek government debt yields tumbled below 6 percent for the first time in four years on Wednesday with investors primed to snap up the country's debut bond issue just two years after it defaulted.
Investor interest in the new five-year bond, to be issued on Thursday on Greece's return to the market after a four-year exile, totaled 11 billion euros on the eve of the sale, sources close to the deal told IFR, a Thomson Reuters service.
Greece plans to raise up to 2.5 billion euros from the sale with initial price indications of 5.0-5.25 percent yield.
Ten-year Greek yields dropped as low as 5.896 percent, breaking below 6 percent for the first time since early 2010, back to levels before Athens was shut out of the bond market and became the first euro zone country to get a bailout.
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.
"If you look at the appetite for excess yield it is extremely high," said Hans Humes, chief investment officer at Greylock Capital, confirming he would be buying the new bonds.
"It is going to be well, well oversubscribed because you will have European fixed income investors coming into the bond."
The sale is the country's first since March 2010, or just before it accepted the initial tranche of a 240 billion euro bailout. The country also forced investors to accept painful haircuts on their bond holdings when it restructured 130 billion euros of debt in 2012.
Humes said the only major risk to Greece's market recovery was that the anti-euro Syriza opposition party was leading in polls. But, he added, if they did come to power and the economy was recovering, they probably would not risk hurting it by forcing another restructuring.
The political unease was not enough to faze investors like Bluebay Asset Management from placing an order for the new paper on Wednesday.
"We fully expect it to do well, it's all part of a pretty relentless reach for yield in Europe at the moment," said David Riley, head of credit strategy at Bluebay.
"In the past we have seen interest from traditional emerging market funds in the post-restructuring period, but I suspect at this kind of yield we are also likely to see interest from more European investors."
GREEK YIELD DOWNDRAFT
Yields on sovereign bonds from the euro zone's periphery dipped in Greece's wake but remain slightly higher on the week after European Central Bank policymakers warned that any move to print money to raise low inflation was still a long way off.
Traders said a surge in Greek yields after a successful debt sale was likely to push yields back to multi-year lows.
"Yields in Portugal, Italy, Spain and Ireland are no longer just compared to what is below them, but also now to what is above them," said Owen Callan, a senior analyst at Danske Bank.
"As Greek yields fall, that should help provide further momentum in these markets."
The yield on Portugal's 10-year benchmark fell 2 bps to 3.92 percent, while Irish and Italian paper fell 2 bps to 2.95 percent and 3.20 percent, respectively. Spanish 10-year yields were unchanged at 3.21 percent.
Ireland, which completed its bailout in December, and Italy will also conduct auctions this week and should benefit from returning demand for debt from the bloc's riskier periphery.
Ireland will sell 1 billion euros of 10-year debt on Thursday, while Italy will offer up to 7.25 billion euros via taps of three, seven- and 30-year bonds on Friday.
Portugal is looking to hold its first bond auction since its 2011 rescue this quarter, providing further evidence that it can exit the bailout programme unassisted.
Euro zone bonds have rallied since ECB President Mario Draghi opened the door to central bank asset purchases last week. A raft of ECB policymakers have since stressed they were only preparing for quantitative easing, however, and would move only if the inflation outlook deteriorates significantly. (Additional reporting by John Geddie; Editing by Tom Heneghan)