* Greek yields extend recent falls
* Portugal buys back 50 mln euro of 2015 bonds
* Buyback is second such move so far this year
By Emelia Sithole-Matarise
LONDON, March 18 (Reuters) - Greek yields fell sharply on Tuesday after Athens and international lenders struck a deal to unlock the next tranche of emergency loans following protracted negotiations.
The deal comes after six months of talks between Greece and its lenders - the European Commission, the European Central Bank and the International Monetary Fund - on reforms Athens must implement to get the next cash instalment.
Greek Finance Minister Yannis Stournaras confirmed an earlier Reuters report that a deal to unblock the next bailout funds had been reached.
“It’s (bailout deal) another catalyst in the overall picture and adds to sentiment which has been very positive since the start of the year,” said Michael Leister, a strategist at Commerzbank.
“All these bits and pieces fit together and reflect the overall sense that investors are hunting for yield and are probably comfortable dipping their toes back into the Greek market.”
Greek 10-year yields slid 18 basis points to 6.87 percent and 30-year bonds yielded 6.70 percent , down 17 bps on the day. They resumed a downward trek that was interrupted last week as the bailout review talks looked set to drag on until the end of the month.
While junk-rated Greek bonds still offer higher yields than the rest of the euro zone, improved sentiment in peripheral euro zone debt has driven euro zone yields across the board to multi-year lows as concerns over the debt crisis have eased.
Volumes have also been picking up in a bond market that most investors deserted in 2010 when the debt crisis erupted. By March 11, investors had traded some 888 million euros of Greek government bonds - almost 60 percent of the total for the whole of 2013, Greek central bank data showed. This compares with 680 million in 2012, when Greek debt was restructured.
The improved market tone is also leading some Greek officials to consider issuing bonds earlier than the second half of the year Athens has hitherto flagged.
Yields on equally junk-rated Portuguese bonds reversed some of their earlier falls after Lisbon bought a smaller-than-expected 50 million euros of a 2015 bond in a reverse auction aimed at fostering confidence the country can fund itself after it exits its international bailout this year.
The amount repurchased was miniscule compared with the 1.32 billion euros of October 2014 and October 2015 Portugal bought back in a similar reverse auction last month in a move aimed at easing its redemption burden. Some analysts, however, said the small size probably signalled that the treasury was now comfortable with its redemption profile and did not need to buy a significant amount of the bond.
“Overall this can be interpreted as a sign of strength that they didn’t feel the need to buy back a higher amount because they don’t see the redemption risks,” Leister said.
“It also might be that the price market participants were willing to accept for the bonds was simply too high.”
The rejection late on Monday by Portugal’s opposition Socialists of an agreement with the government on a long-term plan to reduce the budget deficit was seen having little impact for now on demand for the country’s bonds.
Portuguese 10-year yields were last 4 bps down at 4.53 percent, having fallen as low as 4.48 percent earlier, while two-year yields were flat on the day at 1.49 percent.
“In general the fundamental tone is improving. We’ve seen an array of positive news from rating agencies and everybody awaits Portugal to come back to the market and leave the troika (bailout) programme later in the year. That is the key event for Portugal,” said Peter Goves, a strategist at Citi.
Portugal’s 78 billion euro bailout by the EU and IMF expires in May. Questions remain, however, as to whether Portugal can make a clean break from the aid programme agreed in 2011 and do without a safety net, in the form of a precautionary credit line, in case it gets into financial trouble.
Other euro zone bond yields were a touch lower after the German Constitutional Court, as widely expected, upheld a 2012 verdict giving the greenlight to the euro zone’s bailout fund, the European Stability Mechanism.