LONDON: Greek two-year government bond yields dropped around 250 basis points on Monday after Athens reshuffled its team handling talks with European lenders and the International Monetary Fund.
The reshuffle suggested finance minister Yanis Varoufakis, a brash and outspoken economist who was isolated at a Eurogroup meeting in Riga last week, will take a less prominent role in talks.
The Greek government reiterated though that Prime Minister Alexis Tsipras and his top advisers continued to support the finance minister. Greek two-year yields fell 250 basis points to a two-week low of 23.55 percent, having risen to 26.87 percent earlier in the day.
They were on track for their biggest daily drop in over a month.
"The Eurogroup meeting in Riga showed Varoufakis was more or less isolated and it seems that Tsipras has understood that," said Felix Herrmann, a market strategist at DZ Bank.
"The market is a bit relieved (that) his influence has decreased."
The earlier rise was a reaction to fruitless debt relief talks between euro zone finance ministers on Friday which only served to highlight the gulf between Athens and its creditors.
As Greece looks set to run out of cash in the coming weeks, paymaster Germany hinted it was already preparing for a possible default.
There is a 40 percent chance Greece will leave the euro zone, according to a Reuters poll of money market traders. Just over half of respondents said the country could stay in the bloc even if it defaults on its debt payments.
Germany's Bild newspaper reported that Tsipras called German Chancellor Angela Merkel on Sunday because his government had run out of money.
A German government spokesperson confirmed the call had taken place but declined to comment on the contents of the conversation.
"It is difficult to see how an agreement can be made at this stage," said Gianluca Ziglio, executive director of fixed income research at Sunrise Brokers.
Greek 10-year yields fell 64 basis points to 12.84 percent, while two-year yields were up more than 60 bps at 26.65 percent.
Yields on other lower-rated debt also fell, with Portugal's 10-year yields down 4 bps at 1.96 percent, and Italy and Spain's down 4-5 bps at 1.38 and 1.34 percent, respectively.
Analysts said large bond coupon and redemption payments this week, which are four times bigger than new supply, should keep a cap on yield rises in debt outside of Greece. About 60 billion euros are coming back to the market.
German 10-year yields rose 1 bps to 0.165 percent, having hit a two-week high of 0.18 percent on Friday.
JP Morgan Asset Management said on Monday that slow progress on Greek negotiations meant there was now a 50 percent chance of "some form of Greek sovereign default", although it added that the market impact could be contained and would not have to lead to a Greek exit from the currency bloc.
Sunrise's Ziglio said it would be difficult for Greece to stay in the euro if it defaulted.
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