LONDON: German Bund yields stabilised on Wednesday as the possibility of Greece and the European Union converging towards a vital cash-for-reform deal before Sunday's deadline curbed demand for the top-rated asset.
The stabilisation follows a drop of more than 10 basis points on Tuesday as inflation expectations fell due to a rout in commodity markets amid deepening Chinese stock market losses.
Greece sold 1.625 billion euros of six-month T-bills to refinance a 2.0 billion euros issue maturing on Friday.
Analysts said the rollover was possible due to continued European Central Bank support for Greek banks, the main buyers of T-bills. French President Francois Hollande said the ECB would ensure that Greek banks had the minimum necessary liquidity to stay afloat until Sunday.
But ECB Governing Council member Christian Noyer warned the ECB had already interpreted its own rules "to the maximum" to help Greece and would be obliged to cut off liquidity as soon as there was no prospect of a deal.
Euro zone members have given Greece until the end of the week to come up with a proposal for sweeping reforms in return for loans needed to keep the country in the euro zone.
They also said detailed plans were in place to cope with any Greek exit.
German 10-year Bund yields, which set the standard for euro zone borrowing costs, were flat at 0.64 percent. "While the Bund momentum looks strong and also underpinned by weak Asian equities, risks of conciliatory pro-deal headlines linger," said Commerzbank rate strategist Michael Leister.
Officials familiar with the talks said euro zone leaders welcomed the change of Greek finance minister, with Euclid Tsakalotos seen as easier to deal with than fellow Marxist academic economist Yanis Varoufakis, who resigned on Monday. Greek Prime Minister Alexis Tsipras told the EU Parliament he would deliver sweeping reform proposals this week.
But many analysts remain sceptical that European creditors will accept anything substantially different than what they have already put on the table, which was rejected by Greeks in a referendum last Sunday.
"Tsipras can presumably merely choose to accept and implement the conditions, which were clearly rejected in the referendum, or to exit the monetary union," said Norbert Wuthe, senior analyst at Bayerische Landesbank.
"Even if there is a chance that Tsipras will accept the terms, we reiterate our call for a Grexit with 70 percent probability. In this environment, Bunds should perform well, while periphery spreads are likely to come under pressure."
Ten-year yields in Spain, Italy and Portugal fell 5-10 basis points, to 2.23 percent for the first two and 3.07 percent for the latter.
The three countries are seen as the most vulnerable to spillovers from the Greek crisis, but so far episodes of contagion have been few and limited.
"The relatively calm bond market suggests that markets either believe in a last-minute deal or that the euro zone -- with the ECB determined to use all the instruments available within its mandate -- can easily stomach a Grexit," said Martin van Vliet, senior rates strategist at ING.
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