* 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
(Updates prices, adds ECB data)
By Abhinav Ramnarayan
LONDON, May 2 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
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
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
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
(Additional reporying by Dhara Ranasinghe; Editing by Mark