German bond yields fell to their lowest in three weeks on Friday, amid mixed signals from Greece's aid talks and US data showing the world's biggest economy shrank in the first quarter. Athens intends to reach an agreement on a cash-for-reforms deal by Sunday, a government spokesman said, although euro zone officials suggested a deal was far from imminent.
The conflicting statements on the outcome of the talks drove investors into assets perceived as safe, such as German Bunds, briefly kicking five-year yields below zero for the first time since April. US Treasury Secretary Jack Lew warned of the consequences for the world economy if Greece and its European Union and International Monetary Fund creditors miss their June deadlines to avert a debt default.
"People are looking at what's happening with Greece - it's the big elephant in the room," said Commerzbank strategist David Schnautz. "The market is taking a safety-first approach with the very uncertain outlook ... regarding Greece and the repayment to the IMF and the repercussions if they fail to pay." A euro zone official said on Thursday that Greece will not be able to get the money still available under its current bailout plan if it does not agree an outline deal by June 5, when a 300 million-euro payment to the IMF falls due.
German 10-year yields fell 5 basis points to 0.48 percent, pulling away from lower-rated equivalents. The move accelerated after numbers showed the US economy contracted 0.7 percent in the first quarter, supporting the view of a later Federal Reserve interest rate hike. Month-end-related buying also kept downward pressure on Bund and US Treasury yields.
Portuguese yields rose 6 bps to 2.60 percent, while Italian and Spanish equivalents were flat at 1.85 and 1.84 percent, respectively. Greek 10-year yields were flat on the day, but two-year yields were up 23 bps at 23.59 percent. The main points of contention in the debt talks remain Greek pension reform, liberalisation of the labour market and the need for Athens to sell more state assets to generate cash - none of which the leftist government wants to do.
A spokesperson for the IMF said on Thursday that countries do have the option of bundling when they have a series of payments in a given month, bringing relief to investors who expect Greece to have a few more weeks for negotiations. Even though failing to pay the IMF may not be deemed a default in the eyes of rating agencies, for investors it would increase considerably the prospect of an exit from the bloc.
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