World Economy

Why Greek bond yields are spiking

The cost of borrowing for embattled euro zone nation Greece got even more expensive on Wednesday, as investors shunned the country's sovereign debt ahead of tough negotiations with its international creditors.

The yield on its 10-year sovereign spiked to 8.401 percent on Wednesday morning before easing back to 8.225 percent. This came after the yield pushed sharply higher on Tuesday afternoon from a level of 8.042 percent at the beginning of the week.

Yields this week have not reached the 9 percent level hit in mid-October when negative sentiment surrounding Greece spread to global markets. However, rising debt yields do highlight that the country's economic woes are far from over, with a crucial deadline in early December looming large on the horizon.

Read MoreEuro zone GDP beats, Greece emerges from recession

"Greece still has sizeable financing needs in 2015 and it remains up in the air how these will be covered, which is likely to be causing market nervousness," Sarah Pemberton, the European economist at Capital Economics, told CNBC via email.

It comes as Athens attempts to exit its bailout program – which has been hugely unpopular in the country - ahead of schedule. The government is hoping to strike a deal with the so-called "Troika" of bailout monitors - the European Union, International Monetary Fund (IMF) and European Central Bank (ECB) - before a December 8 deadline.

One stumbling block to this plan is Greece's fiscal gap for 2015, with both sides unable to agree how large it could be and how it should be addressed.

Read MoreGreece rejects bailout talk, eyes growth

"We are in a tough phase," Greek Finance Minister Gikas Hardouvelis said on Tuesday, during a meeting with Greek President Karolos Papoulias, according to Reuters news agency. "In this interim period, nerves are stretched on all sides. It's not just us, it's also on the side of the lenders."

A left-of-center political party called Syriza has also grown in popularity over recent months, putting more pressure on the conservative-led coalition government. Presidential elections are due in February and there are concerns that a strong performance by anti-bailout parties could trigger a snap election in the country.

Odd Andersen | AFP | Getty Images

"It's a lot of noise and the market is right to be worried," Bill Blain, a senior fixed income broker at Mint Partners, told CNBC via email. "New elections next year look probable."

For investors, the main concern is that the government's reform plans will be rejected by the Troika, according to Blain.

Read MoreEuro zone crisis 2.0? Greek stocks tank

Greece was one of the first countries in Europe to be hit by the global financial crisis of 2008, and the full scope of its problems helped spark the euro zone sovereign debt crisis in 2011. Greece was bailed out by the IMF and EU to the tune of 240 billion euro ($304 billion) and was required to impose a tough—and unpopular—austerity program.

The country managed to exit recession this year and post a positive gross domestic product (GDP) figure last week, but political wranglings have continued nonetheless.

October's spike in yields caused the country's stock market tank nearly 10 percent and spread panic across other European bourses in the region. Prime Minister Antonis Samaras also faced-and won-a confidence vote in parliament which forced lawmakers to back his plans to exit its international aid program early.

Capital Economics' Pemberton warned that more of the same couldn't be ruled out, as the deadline for negotiations looms.

"We saw from the sharp increase in yields in October that market sentiment towards Greece remains vulnerable and I think we will continue to see fluctuations in the coming months," she said.

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