(Bloomberg) -- Greece’s three-year notes rallied for the first time in seven days, reversing a slide that pushed the yield above 20 percent, as the nation was said to retreat from a demand for a debt writedown from its creditors.
Greek 10-year yields fell the most since 2012. Finance Minister Yanis Varoufakis said in London late on Monday that the government wants to exchange existing bonds for new debt linked to the country’s growth, according to a person who attended the meeting and asked not to be identified because they weren’t authorized to speak publicly. Italian bonds climbed, sending rates down by the most since the European Central Bank announced a plan to buy government securities.
“The fact that Greece is making this turn and putting itself slightly more open for discussion has led to the spread narrowing, with an outperformance by Greece of course,” said Mathias Van Der Jeugt, a fixed-income strategist at KBC Bank NV in Brussels. “They’ve put t
hemselves more open than they did in the first week.”
Greek three-year yields decreased 264 basis points, or 2.64 percentage points, to 16.97 percent at 9:50 a.m. London time after jumping to 20.05 percent. The 3.375 percent security due July 2017 rose 3.885, or 38.85 euros per 1,000-euro ($1,134) face amount, to 74.445.
Bond trading still signals losses could be in store for investors, with the spread between shorter- and longer-dated debt indicating a risk of a restructuring sooner rather than later.

Greater Risk

Ten-year rates plunged 112 basis points to 9.83 percent. Typically investors get higher yields for holding securities with a longer maturity to compensate for the greater risk of fixed returns being eroded by inflation.
The proposals outlined by Varoufakis mark a change of course for Greek Prime Minister Alexis Tsipras just a week after he took office. The prospect of a standoff with creditors had sparked a selloff of the country’s bonds and stocks, threatening to infect the rest of the region as some investors questioned how long the ECB’s proposed stimulus measures would keep a lid on contagion.
Varoufakis indicated that the new proposal would allow the country to avoid imposing a formal losses on creditors, the person who attended the meeting said.
Greek equities rallied for a second day, led by lenders. The ASE Index climbed 6.3 percent, heading for its biggest two-day gain since June 2012. A gauge of banks jumped 14 percent after hitting a record low last week.
Italy’s 10-year yield fell five basis points to 1.57 percent, the biggest decline since Jan. 22, when the ECB said it would buy sovereign debt from March as part of a strategy to avert deflation in the euro area.
The rate on equivalent-maturity Spanish debt declined five basis points to 1.44 percent.
To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net
To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Mark McCord