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Greek Fixed Income Monitor - May 2016

A noteworthy upward trend was recorded by the Government Bond Index in May that reached a record high of 401 points. Similar levels have not been recorded again since the construction of the index. Furthermore, for the first time, the index recorded a weighted average yield of 7.1%, which is well below its level one month ago. The agreement for the completion on the Greek program evaluation and the three-point plan for debt relief, gave further impetus to the upturn of the index which had already started in mid-March.

Although market valuations of the government bond market seem to have discounted the positive developments in the program evaluation despite considerable delays, additional references concerning the Greek debt led to further gains. The reduction of economic uncertainty and the imminent restoration of financing for the Greek economy had a significant impact on the markets of both government and corporate bonds. Specifically, in May the Government Bond Index recorded an increase of 8.33% to 397 points. Since the beginning of the year, the index’s value has increased by 10.1%.

One of the main driving factors that is anticipated to further support the positive dynamics observed in May, is the ECB's stance with regard to the decision on waiver lift of Greek government bonds, which is expected to take place before the end of June. Under the optimistic scenario of relatively low political risk and given the loose monetary policy followed by the ECB, yields on Greek government bonds may decline far more than those of European bond issues which are already priced at very low levels (Portugal, Spain, Italy).

A six-month high was also recorded for the Corporate Bond Index with substantial gains for almost all of the corporate issues. Specifically, the index reached 113.8 points in late May, a gain of 4% compared to the same period of the previous month. However, since the beginning of the year the value of the Corporate Bond Index has risen only by 1% in contrast to the European high-yield bonds market, which has realized an increase of 3.82%.

In June, TITAN announced a new bond issue worth € 250 million with 5 Year maturity. The proceeds of this issue are to be used to refinance the bond with coupon of 8.75% that matures on 19/01/2017. This move aims to reduce the company's borrowing costs by taking advantage of better valuations in the corporate bond market.

Despite the positive assessment of markets for the majority of the bonds included in the corporate bond index, following the agreement on May 24 and the decrease in uncertainty about the liquidity of the Greek financing system, comparatively higher profits were recorded for the PPC and ELPE bonds due to the developments in oil prices.

It is important to note that in May we observed deviations between the macroeconomic data for the Greek economy and bond market valuations. For instance, the Economic Sentiment Indicator (ESI) remains at similar levels to those of the previous month as opposed to the Corporate Bond Index which exhibited a strong positive trend after the agreement on the evaluation of the Greek program. Specifically, while the Corporate Bond Index increased by 4%, the ESI fell from 90.3 points in April to 89.7 points in late May, signaling a marginal slowdown in the economic climate. Furthermore, indicative of the deviations between market valuations and macroeconomic data is the marginal downward revision of the GDP of the Greek economy, which declined by 1.4% on a YoY basis in the first quarter of 2016.