LONDON: Short-dated Greek yields touched six-month lows on Friday, having enjoyed their biggest monthly fall since August after a crucial bailout deal and on hopes Greek debt will be accepted into the ECB's QE programme.
The agreement between Greece and its creditors pushed down yields across the euro zone this week and most markets extended those declines on Friday, with German 10-year yields at 11-day lows.
Greek debt has been this week's outperformer after the May 25 deal unlocked bailout loans, along with a provisional offer to help relieve the country's debt mountain.
After six months of uncertainty, the move spurred a sharp fall in short-dated Greek yields, which for some time had been higher than long-dated yields - a so-called curve inversion that reflects fears of default.
Greece's finance minister said on Thursday he hoped the deal meant Athens could swiftly qualify for the European Central Bank's quantitative easing programme of bond-buying, and that the central bank could soon resume accepting Greek government bonds as collateral for lending funds to Greek banks.
DZ Bank strategist Christian Lenk said no decision on the issue was likely at next week's ECB meeting, which is also expected to leave policy unchanged.
But he thought Greek yields could fall a bit further.
"After the breakthrough between Greece and the creditors, some optimism has been priced into the bond market," Lenk said. "There may be a bit more room left (for the yield to fall) but in the medium-term it will depend on the decision on whether (Greek bonds) will be added to ECB QE."
Two-year yields have declined around 370 basis points this month, posting their biggest monthly decline since August 2015 when Athens agreed a third bailout deal with lenders.
German Bund yields meanwhile fell as much as 3 bps to 0.12 percent and were set for their biggest monthly fall since February.
Friday's falls came as oil prices slid below $50, tempering optimism for a rebound in inflation.
US policymakers have also suggested the Federal Reserve is cautious about an interest rate hike next month, given uncertainty around Britain's June 23 referendum on European Union membership.
Market expectations for a June hike, as measured by Fed Fund futures prices, have eased to 26 percent versus 34 percent early on Thursday, according to CME's FedWatch, though they had been close to zero in early May.
Treasury prices were weaker before a 1715 GMT speech by Fed Chair Janet Yellen, forcing German yields off their lows.
The spread between 10-year US and German yields, currently around 170 bps, has widened in recent weeks and could move out further, should Yellen strike a hawkish note on Friday or at her next public appearance on June 6.
Hawks may note latest data showing that the slowdown in US first-quarter growth was not as sharp as initially thought, thanks to a surge in home building and better inventory accumulation.
Lenk said markets were already looking towards the job creation figures due next Friday as a crucial data point.
"All in all, our view remains that the FOMC rate rise is close, and if it doesn't take place at the next meeting it may happen in July," he added.
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