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Greek Fixed Income Monitor - June 2016

The Greek government bond market has tried, throughout the preceding 3-month period to balance two opposing forces. On the one hand, expectations of a successful completion of the evaluation of the 3rd Economic Policy Program, as well as anticipation of the waiver of Greek bonds by the ECB, created a positive environment, defining the end of a period of increased policy uncertainty and liquidity constraints. As a result, the Government Bond Index reached the historical high of 401.34 points at the end of May. However, the increased volatility and low risk tolerance of investors before and especially after the British referendum on whether or not to stay in the European Union, created negative pressures on the Greek bond market. The resulting movements in international markets led to a -4.7% drop in value for the index on 13/6 and 14/6. Moreover, the unexpected result of the referendum was accompanied by significant losses in the Greek bond market with the index recording a decrease of 5.09% on Friday, June 24th. In conclusion, the balance of these two opposing forces led the Government Bond Index to fall by 5.38% in June while, at the same time, remaining 4.7% higher than at the beginning of the year.

Positive developments in the bond market are expected to result from the ECB’s decision concerning the participation of the country in the quantitative easing program. However, such a decision depends on the swift and successful completion of the second evaluation as well as on concrete measures to achieve a sustainable path for Greek debt in the future. A possible delay in the decision of the ECB is expected to extend the highly uncertain state of Greek financial markets, thus strengthening the sensitivity of Greek bonds to international and domestic economic surprises.

Negative dynamics and significant losses were also recorded for the corporate bond market as the high volatility reinforced the difficulty in pinpointing the mechanisms through which the private sector may be affected by the outcome of the British referendum. Specifically, in June the Corporate Bond Index fell 2.16% from its level of 113.8 points in late May. Moreover, the index is still moving below the levels recorded at the beginning of the year, losing nearly 1.4% of its value since then.

Significant losses were recorded for the PPC bonds as the intention to cede 400,000 customers to other electricity providers via a bid auction as well as its strong connection with the public sector was viewed negatively by the markets. An analogous decrease was recorded by both the OTE bonds as well as the bonds issued by Hellenic Petroleum and INTRALOT. In general, corporate bonds whose activities are closely related to the public sector exhibit greater sensitivity when the economic environment is characterized by high uncertainty. Investment interest in Greek corporate bonds remains subdued as the volatility of the Greek market is still high. In addition, the exclusion of Greek bonds from the quantitative easing program makes them uncompetitive compared with those of other European markets. Finally, global economic uncertainty and the loose monetary policy of central banks have driven the yields on corporate bonds to extremely low levels so that investors are pushed towards higher returns in other financial products. Nevertheless, despite the high yields recorded by Greek corporate bonds, increased risk aversion in the current international economic environment makes investors hesitant.