LONDON: Euro zone bond yields fell broadly on Tuesday as investors appeared relaxed ahead of a meeting later in the day at which Greece and its euro zone partners will try to agree last-ditch terms for an aid package to keep Athens in the currency club.
Prime Minister Alexis Tsipras is expected to present a new reform plan to other euro zone leaders in Brussels on Tuesday after Greeks rejected the conditions of a previous bailout offer in a weekend referendum.
The European Central Bank on Monday raised the valuation discounts on the collateral Greek banks provide in return for emergency funding, but did not scale back the lifeline which is keeping the country from financial meltdown.
A clutch of banks, including JP Morgan and Barclays, now see a Greek exit from the monetary union, or a 'Grexit', as more likely than not.
The market reaction, however, would suggest that investors either feel that eventuality is already in the price or are much more hopeful on a deal.
"The markets appear quite remarkably confident on a deal being reached," said Lyn Graham-Taylor, a strategist at Rabobank.
The leaders of Germany and France, the currency area's two main powers, said the door was still open to a deal to save Greece from plunging into economic turmoil and ditching the euro.
Euro area finance ministers are scheduled to discuss the new proposals at a meeting starting at 1300 (1100 GMT) while the bloc's 19 leaders will meet at an emergency summit beginning at 1600 GMT, ensuring a day littered with headlines.
German 10-year yields - the euro zone benchmark - were 7 bps lower at 0.70 percent.
In a sign of how muted the contagion from Greece has been, yields in the peripheral benchmark Italy also fell 7 bps to 2.30 percent and are up just 3 bps on the week.
The spread between the German and Italian benchmarks, a measure of risk aversion in financial markets, has widened by around 10 bps this week - a modest move for this year let alone at the height of Europe's debt crisis in 2011-2012.
Other euro zone yields were down between 1-9 bps on the day, with Austrian bonds the best performer as the country easily offloaded 1.2 billion euros of new bonds.
The only yields to rise were Greece's, which gained 23 bps to 18.34 percent.
"At this stage, it is difficult to say whether this soft reaction is because the market is not too concerned about Grexit now or whether the headlines over the course of the day have led the market to believe that a deal will be forthcoming eventually," said RBC strategist Peter Schaffrik.
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