Greek 5-year yields hit record high on cabinet concerns

Greek five-year yields jumped to record highs on Wednesday as investor concerns that the new anti-bailout government in Athens was squaring up for a clash with international creditors rocked the country’s markets.

Prime minister Alexis Tsipras chaired his first cabinet meeting on Wednesday after appointing a team of anti-austerity ministers and halting privatisation of Greece's biggest port, agreed under its €240billion international bailout.

Markets took this as another signal that he intends to stick to election pledges to scrap the bailout, abandon austerity and renegotiate Greek's debt pile despite warnings from European Union officials and the International Monetary Fund.

Greek five-year yields jumped 117 basis points to 13.12 per cent, an all-time high, while three-year yields were 189 bps higher at 16.09 per cent, close to record highs and 10-year yields were up 54 bps at 10.33 per cent.

Shorter-dated yields extended their gap over longer-term ones, reflecting increasing investor concern that they may not get all their money back.

"It's a continuation of what we've seen in the past few days. Now Mr Tsipras has announced his new cabinet and his new finance minister seems to be a rough guy from the very far left of the political spectrum," said Felix Herrmann, a market strategist at DZ Bank.

“This is raising fears that there’s a clash coming up between Athens and its lenders. The fact that he joined a coalition with the far right is not helping either.”

Other peripheral euro zone bond yields also rose, with Portuguese 10-year yields 10 bps higher at 2.31 per cent while Spanish and Italian equivalents were 6 bps up at 1.45 per cent and 1.59 per cent respectively. They all pulled further away from record lows hit last week after the European Central Bank announced its quantitative easing programme.

Temporary Selloff

Analysts said any backup in peripheral euro zone bond yields except Greece provided a buying opportunity before the European Central Bank starts buying sovereign bonds in March.

“We see temporary (yield spread) re-widening corrections as an opportunity to position for tighter spreads going into QE,” BNP Paribas strategists said in a note.

German yields, the benchmark for euro zone borrowing costs, were up 2 bps at 0.39 per cent after a survey showed consumer confidence was growing in Europe’s biggest economy and before a sale of 31-year bonds in Berlin.

Germany will sell up to 2 billion euros of 31-year bonds later in the day, which falls just outside the ECB’s surprising decision to include 30-year paper in its shopping list of sovereign bonds. Yields on 30-year euro zone bonds hit record lows across the credit spectrum, with those on German paper tumbling just below 1 per cent as investors seeking to maximise returns moved up the yield curve.

Longer-dated paper lagged the rally and some analysts said it looked relatively cheaper to the 30-year paper and may lure investors such as pension or insurance funds looking for a bit of a yield pick-up.

Reuters