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The rollercoaster ride for Greece’s two-year bond yield may be coming to an end. (Maybe)

The yield on Greece’s short term debt maturing in April 2019 has dropped by a thumping 1.3 percentage points after the country’s creditors said they had made encouraging headway on resolving their latest set of bailout tensions. (Yields fall when prices rise.)

Bailout monitors are now due to return to Greece following a meeting of finance ministers and IMF officials in Brussels yesterday, where creditors claimed a partial breakthrough in talks.

In return, the Greek government has agreed to examine ways in which it can raise its income tax threshold and reduce pension spending – measures the IMF has pushed for if the country is to meet its budget targets over the next decade or so.

Investors seem to be taking cheer in the developments, helping the two-year bond yield fall from an eight-month high of nearly 10 per cent earlier this month to 7.3 per cent today – the lowest since January. Yields fall when a bond’s price rises, with Greece’s small bond market leading to dramatic market moves (see chart above).

Creditors however pushed back a deadline to solve their long-standing differences over debt relief measures and budgetary targets, with the IMF pushing for less austerity in the country after seven years of bailouts.

But in hints of a change in tone from the EU, Eurogroup president Jeroen Dijsselbloem stressed that Greece’s reform efforts would shift “away from austerity and putting more emphasis on deep reforms”.

Francois Cabau, economist at Barclays, called the change in emphasis a “key” development that should help alleviate the IMF’s concerns that the Greek economy has been asked to carry too heavy an austerity burden.

Mr Dijsselbloem also insisted there was no immediate need for a political agreement as Greece did not face any short-term cash flow problems until a major debt repayment bill falls in July.

“There is no need for a disbursement in March, April or May”, he said.

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Chart via Bloomberg

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