LONDON: Yields on Greek and other lower-rated euro zone bonds fell on Wednesday on signs Greece may reach an agreement with its lenders and win further respite for its banks from the European Central Bank.
A Greek government spokesperson said Athens would ask on Wednesday for an extension to its loan agreement with the euro zone, which it distinguishes from its international bailout programme.
European Commission President Jean-Claude Juncker told a German magazine he was working with the head of the euro zone finance ministers, Jeroen Dijsselbloem, to extend the existing bailout programme until the summer.
A source had told Reuters late on Tuesday that Athens planned to request an extension of up to six months of its loan agreement with the euro zone, on conditions to be negotiated.
That came after negotiations on a new debt deal collapsed on Monday.
European Union finance ministers have been pushing Greece since then to remain in an international bailout programme rejected by its anti-austerity government. The ECB is expected later in the day to approve emergency funding for Greek banks that have lost deposits at an unnerving rate, helping the country's bonds and stocks to rise.
Greek 10-year bond yields fell basis points to 10.38 percent, having climbed as much as 80 bps on Tuesday, while three-year yields were down more than a percentage point at 17.72 percent.
"The market is taking the view that an agreement between Greece and EU is more likely than not, hence fears of a Greek exit have dissipated somewhat, so we're seeing appetite for riskier markets, including peripherals," said Nick Stamenkovic, a strategist at RIA Capital Markets. Italian, Spanish and Portuguese 10-year yields were 6 to 8 basis points lower at 1.60 percent, 1.55 percent and 2.32 percent respectively.
ECB FIREWALL
The Greek crisis has so far not spilled over to other peripheral euro zone markets, largely because of the firewall of ECB sovereign bond purchases due to start next month. But the spectre of a Greek exit from the currency bloc has created some anxiety, tempering the market's 2 1/2-year rally.
Spanish and Italian yields are about a quarter of a percentage point above record lows they reached after the ECB announced a quantitative easing programme on Jan. 22. Analysts expect the yields to return to those troughs or go even lower heading into the ECB purchases in March.
"The market is clearly positioned for an environment whereby QE will diffuse any damage that could come from a deterioration of the Greek situation," said Matteo Regesta, a strategist at Citi.
"So when there's a bit of selloff, global portfolio managers are inclined to buy the dips, because with the ECB coming to the market in March people are comfortable with being long periphery."
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