LONDON, May 24 (Reuters) - Greek government bond yields touched a six-month low on Tuesday before a meeting of European finance ministers to review Greece’s bailout and discuss the potential for a debt restructuring.
Greek lawmakers on Sunday approved tax increases and a new privatisation fund to help pave the way for a disbursement of new bailout loans and debt relief, boosting sentiment towards Greek bonds and pushing short-dated yields down more than 100 basis points on Monday.
Analysts said further significant falls in yields would now be dependent on a breakthrough in debt relief talks.
The International Monetary Fund and European lenders disagree over the need for immediate debt relief, with Germany pushing to delay any decisions until the Greek bailout program ends in 2018.
Greece needs “up-front, unconditional” debt relief and a sharply lower budget surplus target to make its bailout viable and its debt sustainable over the long term, IMF staff said on Monday.
They said the debt relief component needs to be completed before 2018.
“The fall in Greek bond yields reflects optimism that the reforms passed by the Greek parliament pave the way for support from the Eurogroup later today,” said Ciaran O‘Hagan, a strategist at Societe Generale. “If there is debt relief, you will see further outperformance.”
Greek 10-year bond yields fell 2.2 basis points to 7.33 percent, a six-month low.
That kept the yield spread between Greek bonds and top-rated German peers around 718 basis points - its tightest in six months.
Elsewhere, other euro zone bond yields were down about 2 bps as weaker oil prices supported the outlook for subdued inflation in the euro area even as data pointed to signs of strength in the region.
Strong private consumption and higher construction investment drove a 0.7 percent rise in German gross domestic product (GDP) in the first quarter, data showed.
Analysts said they would also be watching comments from European Central Bank speakers later in the day with speakers including the bank’s chief economist Peter Praet.
“Yesterday ECB talk was dovish again and they are also in wait and see mode, which is supportive for euro zone bonds,” said DZ Bank derivatives market analyst Rene Arecht.
The risk has increased that euro zone inflation expectations drop further and some wage data may already indicate that long term expectations are ‘de-anchoring’, Praet told a Portuguese newspaper on Monday. (Reporting by Dhara Ranasinghe; Editing by Andrew Heavens)