Investors price out Greek default as curve normalises

LONDON: Greek 10-year bond yields fell below longer-dated ones on Tuesday for the first time in three years as investors priced out the risk of Athens defaulting.

The move picked up steam after Fitch Ratings raised Greece's credit rating to B-minus from CCC last week, with Greek 10-year bonds outperforming, squeezing their yields 3 basis points below their 30-year ones and returning the yield curve to a more normal upward slope.

When short-term bonds trade at a higher premium to longer-term ones, the market is pricing in increased near-term default risks.

"It's an indication the market is less concerned about a debt restructuring there, and it is a fair assumption because if Greece will do another restructuring it will probably be the official sector debt that will be hit," said ING strategist Alessandro Giansanti in Amsterdam, referring to the European Central Bank and international institutions.

"The perception of investors has changed. There has been a change in trend in public finance policies. If the trend of reduction in the deficit continues we cannot rule out that even next year they can come back to the market."

Just before Greece's debt restructuring in March 2012, 10-year yields were a full 15 percentage points higher than their 30-year counterparts.

Thin liquidity in a debt market that was restructured last March also exaggerated the recent fall.

The rally in Greek bonds coincided with a broad fall in peripheral euro zone borrowing costs as expectations of further monetary easing from the European Central Bank and abundant central bank cash in the financial system has pushed investors into riskier assets.

"In the ongoing low interest rate environment they still offer one of the highest yield pickups you can get anywhere." said Christian Lenk, a strategist at DZ Bank.

Speculation that the US Federal Reserve might start slowing down its bond buying after upbeat data and comments from some Fed officials last week has, however, slowed the rally in recent days.

Bund futures were down 20 ticks at 144.66, retreating further from one-week highs on caution before Fed Chairman Ben Bernanke testifies in Congress on Wednesday. His comments will be parsed for clues on where the central bank stands on its stimulus programme.