Greek bonds rally with Italian peers as Tsipras said to retreat

Greece’s three-year notes rallied and credit-default swaps tied to its bonds slid as the government was said to retreat from a demand for a debt writedown, looking to avoid a crisis that may have led to private-investor losses.

Greek 10-year yields fell the most since 2012 as stocks rose for a second day. Finance Minister Yanis Varoufakis said in London late on Monday that Greece wants to exchange debt owned by the European Central Bank and the European Financial Stability Facility for new obligations linked to economic growth, according to a person who attended the meeting and asked not to be identified because they weren’t authorized to speak publicly. Italian and Spanish 10-year bonds climbed.

“The fact that Greece is making this turn and putting itself slightly more open for discussion has led to the spread narrowing, with an outperformance by Greece of course,” said Mathias Van Der Jeugt, a fixed-income strategist at KBC Bank NV in Brussels. “Nothing is mentioned on the private sector. In 2012 it was the private sector that took the biggest hit.”

Greek three-year yields decreased 281 basis points, or 2.81 percentage points, to 16.80 percent at 2:23 p.m. London time after jumping to 20.05 percent. The 3.375 percent security due July 2017 rose 4.135, or 41.35 euros per 1,000-euro ($1,134) face amount, to 74.695.

Bond trading still signals losses could be in store for investors, with the spread between shorter- and longer-dated debt indicating a risk of a restructuring sooner rather than later.

Greater risk

Ten-year rates plunged 148 basis points to 9.47 percent. Typically investors get higher yields for holding securities with a longer maturity to compensate for the greater risk of fixed returns being eroded by inflation.

Greek equities rallied for a second day, led by lenders. The ASE Index climbed 10 percent, the steepest increase since August 2011. Italy’s FTSE MIB Index and Spain’s IBEX 35 Index are up more than 2 percent.

Trading of Greek government bonds across all maturities through the electronic secondary securities market, or HDAT, was 6 million euros on Monday, ANA reported. Monthly trading volumes plunged to zero in October 2011 from a peak of 136 billion euros in September 2004, Bank of Greece data show.

The difference between the bid and offer yields for Greek 10-year securities, a measure of the bonds’ liquidity, was about 35 basis points on Tuesday, according to data compiled by Bloomberg. In contrast, the spread on similar-maturity German bunds, the euro region’s benchmark securities, was 0.2 basis point.

Creditor standoff

The proposals outlined by Varoufakis mark a change of course for Greek Prime Minister Alexis Tsipras just a week after he took office. The prospect of a standoff with creditors had sparked a selloff of the country’s bonds and stocks, threatening to infect the rest of the region as some investors questioned how long the ECB’s proposed stimulus measures would keep a lid on contagion.

Varoufakis indicated at the meeting with financiers that the new proposal would allow the country to avoid imposing formal losses on creditors, the person who attended the meeting said.

Greek yields are still higher than they were on the last trading day before the nation’s parliamentary election on Jan. 25, with the new government yet to meet German Chancellor Angela Merkel. Germany expects negotiations to drag on until the current round of bailout funding runs out and is prepared to play a waiting game until April or May, when Greece approaches a cash crunch, said a person familiar with the matter who asked not to be identified discussing internal talks.

Deal ‘possible’

Euro-region governments and the crisis-fighting fund they set up in 2010 are owed almost 195 billion euros by Greece, mostly in emergency loans. That’s about 62 percent of the total debt and compares with 17 percent held by private investors. Private bond holders suffered losses of more than 100 billion euros in Greece’s last debt restructuring, in 2012.

A deal between Greece and its creditors is feasible, according to Russel Matthews, a money manager who helps oversee $66 billion at Bluebay Asset Management LLP, who attended the meeting with Varoufakis.

“There is a long road ahead and negotiations are still going to be tortuous but I do believe that there is a deal to be done,” Matthews said in an interview on Tuesday in London. The company moved back to overweight in peripheral bonds after being more cautious since the elections as initial signs from new government were not positive, he said.

Bank bonds

Credit-default swaps insuring $10 million of Greek government debt for five years dropped to $4.1 million upfront and $100,000 annually, according to CMA. The contracts now signal a 67 percent probability of default, down from 70 percent yesterday, the prices show.

Bonds sold by Greek banks rose for the first time in seven days, with National Bank of Greece SA and Piraeus Bank SA leading gains in Bank of America Merrill Lynch’s Euro Financial High Yield Index. Hellenic Telecommunications Organization SA led an increase in corporate high-yield bonds, according to Bank of America’s Euro High-Yield Constrained Index.

Italy’s 10-year yield fell six basis points to 1.57 percent, the biggest decline since Jan. 22, when the ECB said it would buy sovereign debt from March as part of a strategy to avert deflation in the euro area.

The rate on equivalent-maturity Spanish securities declined five basis points to 1.44 percent.

German bonds, perceived to be the safest in the region, declined, with the 10-year yield rising three basis points to 0.34 percent.