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Greek Fixed Income Monitor - June 2017

Greek Fixed Income Monitor: Persistence in the Greek Bond Rally

The momentum given to the Greek government bonds by the Eurogroup on June 22 continued in June with the Treasury Bond Index recording a new historic high. More specifically, the Index rose in June by 4.63% compared to the previous month, reaching 473.61 points, while on 23 June it reached a new record high at 474.02 points. The increased interest of the markets in Greek government bonds comes at a time when the liquidity conditions of the Greek economy have improved and investment trends are characterized by a “search for yield” attitude. In particular, the Greek Government Bond Index increased by 15.58% since the beginning of the year, compared to a drop by 0.73% in the Bloomberg European Government Bond Index (BEUR Index).

One further positive aspect is Moody's decision to upgrade the Greek credit rating from Caa3 to Caa2 along with a change in the outlook of the Greek economy from stable to positive. The key drivers for this decision were on the one hand the successful completion of the second programme review and on the other hand the expectations for improved liquidity conditions and macroeconomic outlook in Greece. As expected, these developments were followed by a large drop in Greek spreads (10-Year Greek bond yield versus German 10-Year bond yield) to 495 basis points, i.e. at similar levels with those of 2014.

However, despite the downward trend in the Greek spreads after the Eurogroup in June there is still high uncertainty as regards both the macroeconomic environment and the course of fiscal adjustment and debt level. According to the macroeconomic fundamentals model for spreads, in June the 10-Year spread was approximately 150 basis points lower (bond markets overvalued) than its "fair" price.

The Corporate Bond Index stabilised at 131.3 points at the end of June, as developments in the Greek economy turned investor interest towards government issues. Specifically, the Corporate Bond Index recorded a monthly increase of 0.15% from 131.1 points at the end of June. Compared to the beginning of the year, the index is recording 3.48% gains, i.e. similar to high-yield European corporate bonds.

The successful issuance of a 5-year bond by Mytilinaios Group, which was oversubscribed by 2.5 times and had a coupon at the lower bound of 3.1%, is indicative of the trend in the Greek corporate bond markets.