June 5, 2015 / 8:38 AM / 5 years ago

UPDATE 3-Athens' brinkmanship with lenders hoists Greek yields

(Updates prices, adds U.S. payrolls)

By Emelia Sithole-Matarise

LONDON, June 5 (Reuters) - Yields on Greek and other low-rated euro zone bonds rose on Friday after Athens rejected its creditors’ proposals for a reforms-for-cash deal that the country needs to avoid defaulting on its debts.

Greece delayed repayment of an International Monetary Fund loan on Friday and a deputy minister said the country might call snap elections to break the impasse with the lenders.

All this kept investors nervous after a vicious bond market sell-off this week spurred by the European Central Bank playing down market volatility and strong euro zone inflation data.

On a more positive note, the Bundesbank raised its forecasts for German economic growth on Friday, bolstering investors’ view that the broader euro zone economy may have turned a corner, which would justify higher bond yields.

Greek two-year yields soared nearly 3 percentage points to over 25 percent, their highest since the bonds were issued last July, while 10-year yields jumped 82 bps to 11.61 percent.

“The rejection ... of the creditors’ proposals means that we are in a more difficult state than people had hoped at this stage,” said Commerzbank strategist Christoph Rieger.

“Clearly they (Greeks) have bought some more time by bundling the IMF payments and now the end of June is a make or break date, but overall the news flow out of Greece is negative.”

Greece opted to miss a debt payment due to the IMF, choosing as widely expected to bundle its four payments due this month into a single 1.6 billion euro lump sum due on June 30.

Economy Minister George Stathakis said the country has the money to pay the 300 million euros due on Friday but that it chose not to. He said Greece cannot accept new proposals put forward by its euro zone, IMF and ECB lenders.

Greek Prime Minister Alexis Tsipras, facing fury among his leftist supporters, demanded changes to the tough terms set out for a deal to stave off default. He will put the proposals to parliament from 1500 GMT.

Many analysts expect a last minute agreement that would avert a Greek exit from the euro but say the coming weeks could see further ructions in Greek politics, keeping markets on edge.

“Fasten your seat belts for what could be a rough ride in Greece,” said Berenberg Bank chief economist Holger Schmieding.

Portuguese, Italian and Spanish 10-year yields were 6-8 bps higher at 2.94 percent, 2.21 percent and 2.19 percent, respectively, near multi-month peaks reached on Thursday.

German 10-year yields, which set the benchmark for euro zone borrowing costs, were 2 bps higher at 0.86 percent after the Bundesbank raised its growth and inflation forecasts and Spain reported strong industrial production figures. They were still off an eight-month high of 0.998 percent hit on Thursday.

Robust data in the United States, where non-farm payrolls increased by a better-than-expected 280,000 last month and wage growth accelerated to 2.3 percent, did not have a lasting impact on European bond markets. (Additional reporting by Marius Zaharia; Editing by Catherine Evans)

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