LONDON World stocks held steady near a 5-1/2 month high on Friday as investors anticipated an imminent conclusion to Greek debt talks while lower Spanish bond yields and a fall in Italy's six-month borrowing costs also supported the euro.
EU Economic and Monetary Affairs Commissioner Olli Rehn said talks with private creditors on restructuring Greek debt are "very close" to closing. Athens needs a deal to secure further international aid and so avert a disorderly default when a major bond redemption falls due in March.
Italy's six-month borrowing costs fell below 2 percent at an auction, their lowest since May, thanks to appetite from mainly domestic banks flush with European Central Bank funds. Spanish 10-year government bond yields also fell to their lowest since November 2010.
Investors are reluctant to push risky assets aggressively higher, however, as jitters grow that Portugal may follow Greece in requiring another bailout or seeking to restructure its debt, sending Portuguese bond yields soaring.
"Investors seem to have grown used to Greek debt swap talks dragging on," said Ankita Dudani, G10 currency strategist at RBS. "What the real risk for the euro is contagion from a disorderly Greek default and whether Portugal needs another bailout."
The MSCI world equity index erased earlier losses to stand unchanged on the day. The benchmark index hit its highest level since August on Thursday after the Federal Reserve pledged to keep interest rates near zero for the next three years.
European stocks were steady on the day while emerging stocks .MSCIEF rose 0.2 percent.
Brent crude oil rose 0.6 percent to $111.53 a barrel.
Bund futures were flat on the day.
Ten-year Spanish government bond yields fell 14 basis points to 4.85 percent, narrowing the yield spread against German Bunds to 297 basis points.
Portuguese five- and 10-year government bond yields hit fresh euro-era highs of 20.48 percent and 15.36 percent respectively.
The dollar fell a quarter percent against a basket of major currencies. The euro rose 0.2 percent to $1.3134.
After weeks of wrangling over the coupon that Greece will pay on new bonds it will swap for existing debt, the focus has shifted to whether the ECB and other public creditors will follow private bondholders in swallowing losses.
Euro zone members may have to increase their financial support for Greece if Athens and the private sector do their part to address the country's debt crisis, Eurogroup head Jean-Claude Juncker told a newspaper.
Italy, on the other hand, has enjoyed a recent rapid decline in yields, mostly driven by demand from domestic banks holding the ECB's cheap three-year loans.
"Italy has seen some relief," said Michael Hewson, market analyst at CMC Markets.
The yen was on track to post its biggest daily gain in a month against the dollar, rising beyond 76.90. The dollar hit a two-month high of 78.29 yen on Wednesday after Japan reported its first annual trade deficit since 1980.
(Additional reporting by Anirban Nag and Blaise Robinson; Editing by Catherine Evans)