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Greek Fixed Income Monitor - January 2017

The impact of Eurogroup’s decisions on the Greek programme and the disbursement of tranches for the refinancing of the Greek debt were key factors for the evolution of the Government Bond Index throughout 2016. Such examples are the Eurogroup meetings on 11th February and 9th May, which were followed by an index increase by 8% and 5% within seven days. That was also the case at the recent Eurogroup on 5th December, which was followed by a 4.4% index decline.

Consequently, it is not surprising that the Eurogroup deadlock of 26th January 2017 resulted in further decline of the Greek financial market as it was evident that there were many obstacles hindering the completion of the second evaluation of the Greek programme. Specifically, the Government Bond Index recorded a fall of 4.33% on a monthly basis over the three last days of January despite significant positive momentum recorded during the first two weeks of the same month. The weighted average yield to maturity of the index rose by approximately 160 basis points compared to the end of November, exceeding the level of 7% in the last week of January in sharp contrast to the low volatility environment of the previous two months. On an annual basis, in 2016 the Government Bond Index performed considerably well, as it increased by 13.66%, albeit with relatively weaker dynamics compared to 2015, when profits exceeded 20%.

Regarding index valuations, despite the downward trend of credit risk in November, the five-year CDS recorded a sharp spike in mid-December, following the announcement of the ESM about the freezing of short-term debt relief measures. Specifically, credit risk increased by 118 basis points in December from 928 units in late November and remained above 1,000 basis points in January. The Government Bond Index tracks closely our “fair” value model, which depends on credit risk, as opposed to the previous two months, during which an important overpricing was recorded. More specifically, the increase in credit risk and volatility in the bond market since early December is compatible with weighted average yield for the Government Bonds Index close to 8.15%, ie nine basis points lower than the yield at the end of January.

In contrast to the sovereigns, the Corporate Bond Index showed signs of stabilisation at the beginning of 2017 and continued its slow upward trend. Specifically, the index increased by only 0.05% on a monthly basis, reaching the level of 127.3 points in January from 126.9 points in the previous month and 128.8 points at the end of November. On an annual basis, in 2016 the index closed with gains equal to 3.73%, markedly improved compared to the losses of -2.19% recorded in 2015. The weighted average yield on corporate issues at the end of 2016 reached 5.46%, recording a 38 basis points decline compared to the same month of the previous year. Similarly, in January, the yield on corporate bonds did not record any important changes, remaining close to 5.5% and with no signs of explicit association with the risk premiums on government debt securities. Low interest rates in the corporate bond market led several companies such as Intralot, Hellenic Petroleum, Coca-Cola, and Titan to proceed to bond issuance in 2016, aiming to finance projects or roll-over older issues. Additionally, the new bond issues from companies like Crystal Almond, which issued a new bond worth €250 million maturing in 2021 as well as Housemarket whose bond issue of €40 million was oversubscribed, were positive developments for the Greek corporate bond market.