April 20, 2015 / 7:50 AM / 5 years ago

Grexit worries provide "momentum" for Bund yields to test zero

LONDON, April 20 (Reuters) - German 10-year borrowing costs resumed a descent towards zero on Monday, with worries about Greece falling out of the euro zone increasing demand for top-rated assets even as the ECB’s bond-buying programme quashes yields.

Athens has been stuck in negotiations with its euro zone partners and the International Monetary Fund over economic reforms required by its lenders to unlock remaining bailout funds as it is rapidly running out of cash.

The IMF’s European head, Poul Thomsen, told German newspaper Handelsblatt talks have gained momentum but they were still a long way from the finish line.

Greece’s Finance Minister Yanis Varoufakis said on Sunday that if Athens were to leave the euro zone, there would be an inevitable contagion effect.

German 10-year Bund yields fell 1 basis point to 0.07 percent, having fallen as low as 0.05 percent on Friday. they have fallen 8 basis points in the past week.

“The momentum of the decline in yields in the last week points technically and psychologically to an impending attack on the zero percent level by the 10-year Bund yield,” said Norbert Wuthe, senior analyst at Bayersiche Landesbank.

Bunds outperformed their euro zone peers, with yields on lower-rated Spanish and Italian 10-year bonds rising 2 basis points to 1.47 percent and 1.48 percent, respectively.

Ten-year yields on Portuguese debt, seen as the next weak link after Greece, were up 4 bps at 2.04 percent.

Spanish, Italian and Portuguese yields have risen 40-60 bps in the past month, with the European Central Bank’s trillion euro bond buying programme limiting the spillover from Greece. At the height of the euro zone crisis in 2011-2012, Portugal was shut out of bond markets, while Spain and Italy were borrowing at an unsustainable cost of around 7 percent.

“The degree of contagion is still limited but there’s no (denying) this is increasingly something that’s disturbing the tightening on the back of ECB QE,” said Martin van Vliet, senior rate strategist at ING.

“There’s a bit too much complacency about Grexit contagion and there’s a compelling case to try to avoid it.” (Reporting by Marius Zaharia)

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