(Updates prices for close)
By Dhara Ranasinghe
LONDON, May 24 (Reuters) - Greek government bond yields held near a six-month low on Tuesday as European finance ministers met to review Greece’s bailout and discuss the potential for a debt restructuring.
Sentiment towards the Greek debt market was boosted after 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.
Short-dated Greek bond yields, which move in the opposite direction to the price, tumbled more than 100 basis points on Monday and extended those falls slightly on Tuesday .
Euro zone finance ministers are likely on Tuesday to approve in principle a reform package from Greece that will unblock new loans, but 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 programme 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 hovered around 7.38 percent, close to a six-month low of 7.33 percent touched earlier in the day.
That kept the yield spread between Greek bonds and top-rated German peers around 720 basis points - its tightest in six months.
“We expect creditors to adopt a friendly tone today, but my gut feeling is that won’t agree on anything concrete until after the UK Brexit referendum next month,” said Lyn Graham-Taylor, fixed income strategist at Rabobank.
Elsewhere, other euro zone bond yields were flat to slightly lower as weaker oil prices supported the outlook for subdued inflation in the euro area.
A survey by think tank ZEW showed that the mood among German analysts and investors worsened unexpectedly in May as risks, including a possible British exit from the European Union, cloud the outlook in Europe’s biggest economy.
Those risks are cited by analysts as a reason why safe-haven German bonds should remain well supported in the weeks ahead even as talk of another U.S. rate rise grows.
Analysts said they would also be watching comments from European Central Bank speakers later in the day, 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 Tom Heneghan)