July 8, 2019 / 10:52 AM / 3 months ago

UPDATE 2-Greek bond yields hit fresh all-time low after conservatives win election

* Greek conservatives win election comfortably

* Mitsotakis’s party won outright majority

* New Greek bond issue talk resurfaces

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds S&P comment, bullets, new bond issue talk)

By Virginia Furness

LONDON, July 8 (Reuters) - Greek bond yields hit new all-time lows on Monday after a weekend election saw Greece’s opposition conservatives return to power with an outright majority, sparking hopes of a renewed focus on strengthening the country’s economic recovery.

Elsewhere, euro zone bond markets reversed some of the sharp yield rises seen on Friday after better-than-expected U.S. jobs data prompted investors to speculate that the U.S. Federal Reserve would not cut rates by as much as expected.

Conservative politician Kyriakos Mitsotakis was sworn in as Greece’s new prime minister on Monday after his New Democracy party stormed to victory in an election on Sunday on a pledge to create jobs and lure investment to the economically stricken nation.

Greece’s debt agency could take advantage of a post-election boost to issue new debt at record low borrowing costs in the coming weeks to repay an expensive International Monetary Fund loan, sources told Reuters on Monday.

“It should be noted that Greek sovereign debt is trading at yield levels consistent with an investment-grade rating,” said Markus Allenspach, head of fixed income research at Julius Baer in a note. “i.e. the market has priced in a lot of positive development from here.”

Greek 10-year bond yields fell by as much as 14 basis points to hit new all-time lows of 2.014%, before pulling back to around 2.08% by late trade.

The Greek/German 10-year bond yield gap was at 242 bps having tightened to as much as 232 bps.

Explaining the retracement, Mizuho’s head of rates strategy Peter Chatwell said that there was some negative reaction for Greek bonds because there is an expectation that New Democracy’s policies will lead to a larger deficit.

“The main move today was because the expected outcome was realized and from here on macro fundamentals will be the driver,” he said.

Still, at current levels, Greek 10-year bond yields are around the same levels as benchmark U.S. Treasury yields .

Greek yields have fallen over 200 bps since the start of the year, and outperformed peers such as Italy, partly fuelled by the hope that New Democracy would take power.

“Under the leadership of the centre-right party New Democracy, the incoming government’s measures could boost Greece’s economic growth potential and alleviate outstanding socio-economic challenges,” S&P Global said on Monday.

The ratings agency said that this view was already captured in its positive outlook on Greece, which it rates B+.

Germany’s 10-year bond yield dipped 1.5 bps to minus 0.37% , having risen sharply on Friday after data showed employment in the United States rebounded strongly in June.

The strong U.S. jobs data has prompted traders to scale back expectations that the Federal Reserve will cut rates by a hefty 50 basis points at its next policy meeting on July 30-31. They still expect a quarter-point cut.

Italy’s Treasury said in late trade it would re-open its 50-year bond. (Reporting by Virginia Furness; Additional reporting by Dhara Ranasinghe; Editing by Toby Chopra and Gareth Jones)

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