Greek bond yields were set for their biggest weekly rise since the end of January on Friday and investors shed other low-rated debt as a stalemate between Athens and its international lenders threatened to bankrupt the country in the coming days.
As the Greek government mixed a tone of defiance with some willingness to compromise with international lenders, prospects have dimmed that Athens can strike a reform deal at a meeting next Friday to unlock much-needed bailout funds.
This has raised fears that Greece may miss payments to the International Monetary Fund (IMF) which total some $1 billion over the next month, amid reports that the country’s cash reserves may dip into negative territory from Monday.
Athens denied on Thursday that it had already explored delaying the IMF payments and had been rebuffed. Missing a payment could mean default and, eventually, exit from the bloc.
After rising more than 1 percentage point on Thursday, Greek 10-year yields rose a further 8 basis points to touch 12.97 percent in early trading. They remain on track for their worst week since January 30.
Strategists said nervousness around Greece was also weighing heavily on other peripheral bond markets. Portuguese 10-year yields spiked 16 bps to a six-week high of 2.06 percent. Italian and Spanish equivalents were up 9 bps at 1.46 percent and 1.44 percent, the highest since mid-February.
“Over the last few days the magnitude of the risk aversion towards Greece has increased substantially,» said Peter Schaffrik, RBC’s head of European rates strategy.
“The market has not always put too much credence to the story that no agreement can be reached, but they are having a major rethink of that now.”
Italy on Friday exchanged 1.7 billion euros of 2025 bonds in return for 2016 and 2017 paper, another step towards increasing the average life of its debt for the first time since 2010.
Traders said an outage on platform provider Bloomberg had little impact on the sale, although it had driven down trading volumes in secondary markets.
Investors, meanwhile, sought refuge from the Greek drama in top-rated German bonds, sending 10-year yields down 4 bps to an all-time low of 0.05 percent.
German bonds out to nine years now have yields below zero.
“Time is running out for Greece,» said Nick Stamenkovic, a strategist at RIA Capital Markets.
“Both sides are playing hardball suggesting everything will come down to the last minute. Investors are becoming increasingly nervous there could be a Greek accident.»