Greek bond yields inch up as investors await crunch debt talks

Greek bond yields inched up on Monday but investors remained cautiously optimistic that Athens would reach a new debt deal with its European partners at talks later in the day.

With Greece’s current bailout due to expire on Feb 28 and deposits flowing out of the country’s banks, talks between the anti-austerity government and its creditors are crucial – possibly for the future of the whole euro zone.

The European Central Bank may have little choice but to halt emergency funding for Greek banks if the stalemate cannot be broken, a move that could see Athens barrel out of the currency bloc.

Economists surveyed by Reuters last week gave a one-in-four chance of Greece leaving the currency area in 2015. This was the highest probability collected by Reuters polls – even those taken during the depths of the debt crisis between 2011-2012.

But even though it remains far from clear that there will be any breakthrough on Monday, in recent sessions bond and stock markets have moved back to levels not seen since before national elections in late January.

“Even though the Greek tragedy has been dominating newspaper headlines of late, causing many Cassandras to come forward and forecast the worst, financial-market investors have been looking decidedly relaxed,» said DZ Bank analyst Christian Lenk.

Greek 10-year yields rose 3 basis points to 9.54 percent, just off a two-week low hit Friday, while Athens’ main bourse slipped back 4 percent but remains near a two-month high.

This investor confidence was also evident in other low-rated debt markets, with 10-year yields in Portugal down 2 bps at 2.37 percent.

Meanwhile, yields on German bonds – which investors tend to flock to in times of stress – were up 1 bps at 0.35 percent.

Germany’s Finance Minister Wolfgang Schaeuble, however, said in a radio interview on Monday that he was not optimistic that a deal could be brokered.

His French equivalent, Michel Sapin backed Germany’s firm position on the talks but said Athens was right to point out that previous debt deals had been agreed by the old government.

Jeroen Dijsselbloem, the Eurogroup president and chair of the meeting, said on Friday that he was «very pessimistic» about the chances of reaching a deal on Monday.