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Greek Fixed Income Monitor - February 2017

The decisions of the Eurogroup meeting on 20th February and the return of the representatives of Greece’s international creditors in the last week of February, boosted expectations for an overall agreement in May. According to the Government Bond Index, markets have already priced in this development for Greek government bonds as it was reflected in the marginal monthly increase by 0.69% in the index over the last ten days of February. Accordingly, the weighted average yield to maturity of the index fell by 60 basis points (bps) to 7.65%, i.e. approximately 36 bps higher compared to the beginning of the year.

Despite the reversal of the negative trend in early February, delays in the closing of the second review will weigh on the Greek bond indices- as has been the case with similar events in the previous months. Moreover, this outcome will probably have a protracted impact if combined with deteriorating macroeconomic and budgetary aggregates. For example, in the adverse scenario that the estimate for the GDP in 1Q 2017 worsens in mid-May and the deadlock in the closure of the review remains, this will lead to higher volatility in the Greek bond market. Within this context, the Government Bond Index increased by only 0.34% in a Year to Date basis in 2017.

The five-year CDS, an important factor underlying the assessments of Greek government bonds, remained high throughout February, moving between 995 and 1,065 bps. Specifically, credit risk declined by only 20 basis points in February from the 1,036 points recorded at the end of January. The markets continue to price the Government Bond Index close to our model’s “fair” value, while the downside risk remains high due to the increased probability of a negative event. According to the model, the estimate of the Government Bond Index average yield is at 8.06%i.e. approximately 41 basis points higher compared to the actual performance at the end of the month.

The time needed until the end of the second review of the Greek economic programme, strongly influences the developments in the corporate bond issuance activity. In particular, the Corporate Bond Index moved slightly downward from 127.5 points in late January towards the level of 126.9 points in February. In contrast to the gains recorded in 2016, the Index remains at the same level as at the beginning of the year. Additionally, the fall of the Economic Sentiment Indicator (ESI) to 92.9 points compared to 95.1 points at the end of January, might cause extra pressure on corporate bonds. The key factor in the ESI decline, is the significant volatility that characterises the economic environment in Greece, which is attributed to uncertainty about the economic programme.

The weighted average yield of corporate bonds in late February closed at 6.72%, increased by 135 basis points compared to the previous month. We should emphasise, however, that the sizeable increase in the weighted average yield to maturity (YtM) of corporate bond issues is not so strongly related to the progress of the assessment as it is to the developments in the restructuring plan of Frigoglass. Specifically, the YtM of the bond issue with an outstanding amount equal to €250 mn, maturity in 2018 and an 8.25% coupon surged by almost 20 percentage points, reaching the level of 70.1% in mid-February. The specific bond has a weight equal to 4% in the Corporate Bond Index value and therefore an increase in its YtM by 20 percentage points may result to an increase of around 80 basis points in the Index weighted average yield.