OREANDA-NEWS. February 05, 2015. Greek yields rose on Wednesday as a media report that the ECB was unwilling to approve Athens' proposal to raise the ceiling for its treasury bill issuance cooled optimism that a compromise debt deal may be reached.

Citing people familiar with the matter, the Financial Times quoted one euro zone official as saying the European Central Bank "will play hardball" on Greece's plans to sell short-term Treasury bills worth 10 billions euros to tide over the debt-ridden country for the next three months.

Without the financing, Greece will exit its international bailout programme, which has been in effect since May 2010, and might run out of cash within weeks, the newspaper reported on its website late on Tuesday.

Finance Minister Yanis Varoufakis gave no details of his meeting with ECB President Mario Draghi on Wednesday but said Athens could count on the central bank's support.

Investors remained nervous, putting a brake on Tuesday's sharp rally in Greek bonds triggered by an apparent softening in demands of a debt write-down by the anti-austerity government.

Greek three- and five-year yields were up 30-50 basis points at 17.2 percent and 13.5 percent respectively while 10-year yields were 30 bps higher at 10.17 percent. These were still modest moves after Tuesday's 140-300 bps points fall in the yields and many analysts expect trade to remain volatile until a deal is reached.

"We've stepped back from the abyss but there are still tough negotiations to get through between the new government and the EU," said Nick Stamenkovic, a strategist at RIA Capital Markets.

"The proposals from the finance minister seem to fall on deaf ears at the ECB ... An early agreement seems unlikely and Greek yields will continue to trade in volatile fashion until we get clarity."

PROTRACTED TALKS

Prime Minister Tsipras and Varoufakis have been visiting European capitals this week to drum up support for their plans to restructure its public debt after receiving 240 billion euros in bailout money since 2010.

Their proposal to swap Greek bonds held by the ECB and national governments for either growth-linked or perpetual bonds has so far met a sceptical reception from euro zone officials.

Many investors remained wary of Greek bonds given the uncertainty. A sale of 812.5 million euros of six-month Treasury bills in Athens drew less demand than a previous sale of similar bills in January. The bills were priced at a yield of 2.75 percent, up 45 bps from the previous sale.

"The negotiations could remain quite protracted over the coming months and plenty of uncomfortable moments can arise," RBC strategists said in a note.

"This leaves the market vulnerable to plenty of headline risk and increased volatility and we are still reluctant to advocate any outright duration position in Greek assets just yet."

Yields on other peripheral euro zone bonds were slightly firmer with investors looking to the start next month of the ECB's sovereign bond purchases. Italian and Spanish 10-year yields were 2-3 bps lower at 1.57 percent and 1.47 percent respectively.