May 2, 2017 / 8:32 AM / 6 months ago

UPDATE 3-Greek bond yields hit 2-1/2-year low after bailout breakthrough

* Greek govt yields drop to lowest since 2014

* Analysts still worry over IMF’s absence from Greek deal

* Other euro zone yields rise as Nowotny proposes ECB rethink (Updates prices, adds ECB data)

By Abhinav Ramnarayan

LONDON, May 2 (Reuters) - Greece’s borrowing costs hit their lowest since late 2014 on Tuesday after Athens announced it had agreed a deal on bailout reforms, paving the way for a disbursement of rescue funds.

Greece and its foreign creditors reached a deal early on Tuesday on a package of bailout-mandated reforms, Greek Finance Minister Euclid Tsakalotos said, a move that should unlock cash needed to repay upcoming debt obligations and avoid a default.

But analysts said yields were likely to remain well above euro zone peers until there is certainty over future debt relief and whether the International Monetary Fund will be involved in the country’s third bailout.

“Greece has bought some time, but the IMF needs to be involved for a real breakthrough,” said DZ Bank strategist Daniel Lenz. “There is no breakthrough on the question of major debt relief for Greece, which would be a real trigger for market movement.”

A German Finance Ministry spokesman said the deal was an important intermediate step, adding that more clarity was still needed on issues like Greece’s primary surplus.

The yield on short-dated Greek government bonds fell 60 basis points to 5.89 percent, its lowest level since October 2014.

Ten-year Greek bond yields tumbled 42 basis points to 6.06 percent, the lowest since September 2014.

Talks between Greece and its creditors have dragged on for half a year, mainly due to a rift between the EU and the IMF over fiscal targets.

The IMF believes more relief for Greece is needed for the country’s debt profile to be sustainable.

The fall in Greek yields came against a backdrop of rising borrowing costs for most other euro zone countries as ECB governing council member Ewald Nowotny flagged a potential re-evaluation of the central bank’s ultra-loose stance.

The European Central Bank will have to hold a discussion next month about its strategy for 2018 and the eventual exit from its ultra-easy monetary policy, Nowotny said in comments published on Tuesday.

Germany’s 10-year government bond yields, the region’s benchmark, were up 1 bps at 0.33 percent, and most other high-rated government bond yields were marginally higher.

A key market gauge of long-term euro zone inflation expectations, the five-year five-year breakeven rate, rose to 1.6563 percent, its highest level in about six weeks.

Italian and Portuguese government bonds underperformed, rising 2-3 bps .

But they trimmed increases in late trade after data showed the ECB bought more French and Italian bonds than its own rules allow last month, which probably helped keep financial markets calm in the tense run-up to the first round of France’s presidential vote. (Additional reporying by Dhara Ranasinghe; Editing by Mark Trevelyan)

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