Greek bonds shine after parliament passes reforms

Borrowing costs in Greece fell sharply on Monday, with 10-year government bond yields hitting four-month lows after lawmakers in Athens passed unpopular pension and tax reforms that could encourage the country's creditors to unlock bailout cash.

Two-year Greek bond yields tumbled 80 basis points, while five-year yields slid 30 bps, outperforming other euro zone bond markets.

The approval came hours before euro zone finance ministers were due to discuss Greece’s progress on reforms and whether it had met the terms of a multi-billion euro bailout.

Signing off on the reform review will unlock more than €5 billion ($5.7 billion) to ease Greece’s squeezed finances and meet debt repayments due in June and July. Greece also hopes the sign-off will launch discussions on debt relief.

“The vote in parliament is constructive and positive for the Eurogroup (ministers) talks and that should help the decision to give Greece additional support,” said Patrick Jacq, European rate strategist at BNP Paribas.

“Although the Greek bond market is illiquid, the fact that yields are lower is a good sign,” he added.

Greece’s 10-year bond yield was down 20 bps at 8.4 per cent, its lowest level in four months. That contrasted with a rise of 1 bps in top-rated German Bund yields to 0.16 per cent, squeezing the yield gap between the two to its narrowest in almost four months.

Some hedge funds are eyeing investments in Greek stocks and debt they see as cheap, predicting a recovery after seven years of crisis.

They say last year’s recapitalisation of Greek banks and new bankruptcy rules that should make it easier for lenders to sell their non-performing loans, plus a fall in stock prices to historic lows, create opportunities for risk-taking investors.

Greek stocks rose 1 per cent on Monday to four-month highs.

Some analysts were cautious, pointing to other obstacles in Greece’s path such as a request from the IMF for legislation on contingency measures in the event current fiscal targets are not met.

Greece's reform package is a major step forward but Eurogroup finance ministers will probably not release a multi-billion euro bailout right away, European Commission Deputy President Jyrki Katainen said on Monday.

"There are still significant hurdles, especially the contingency measures the IMF is asking for," said Jennifer McKeown, senior European economist at Capital Economics.

“Greece is still saying it can’t pass those measures and assuming this can be addressed, there is still the issue of debt relief which is what Greece really needs,” she said.

Elsewhere, most other euro zone bond yields were flat to a touch higher in the face of firmer oil prices and stock markets.