Greek 10-year government bond yields tumbled to their lowest in nearly three years on Wednesday after Fitch upgraded the country's sovereign credit ratings, adding to the upbeat mood in euro zone debt.
The sharp fall in borrowing costs a day after Fitch Ratings raised Greece to B-minus from CCC on Tuesday suggested investors were pricing out that possibility, as well as the risk of another default, analysts said.
The move also coincides with a broad fall in euro zone borrowing costs in April fueled by abundant central bank cash in the financial system. Thin liquidity in a debt market that was restructured in March 2012 also exaggerated the fall.
"The euphoria that exists in the markets overall has slipped into Greece as well without necessarily (being) realistic because Greece has not resolved the major issues that we have," Athanasios Ladopoulos, chief investment officer at Swiss Investment Managers said.
Ten-year Greek yields fell to 8.21 percent - their lowest since June 2010, a month after the country became the first in the region to receive an international bailout. The yeilds were last 52 basis points lower at 8.84 percent.
In other peripheral euro zone markets, Italian yields rose as traders made room on their books for new debt from the sale via a syndicate of banks for a new 30-year bond.
Italy aims to raise up to 6 billion euros of the bond after receiving orders in excess of 12.7 billion euros, a bank managing the deal said, according to IFR, a Thomson Reuters news and market analysis service.
Investors expected solid appetite for the debt after successful syndications from Slovenia and Portugal earlier this month, and huge demand for Spain's new 10-year bond in the previous session.
PERIPHERY RALLY TO RESUME
Ten-year Italian government bond yields were up 2.1 basis points at 4.02 percent and the thirty-year equivalent was 6 bps higher at 4.84 percent. Spanish 10-year yields stabilised at 4.34 percent.
"I would look for a resumption of the convergence trade. Yields in the core markets are still so low that people are going to be happy to hold Italy and Spain for the carry (yield pick-up)," one trader said.
The trader added that with the 30-year Italian debt sale out of the way, investors could start looking for higher returns further up the curve, which would narrow the yield gap between 10- and 30-year bonds from its current 84 bps.
_0">"The 10/30-year curve in Italy is very steep so now that this issue is out of the way I can see some substantial flattening coming in. The curve could come in 20-30 basis points," he said.
At the top end of the credit spectrum, German Bunds fell 10 ticks to settle at 144.64. They eased along with UK gilts, which extended losses after the Bank of England modestly raised its growth forecasts and Governor Mervyn King said the economy was set for a recovery.