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Greek Fixed Income Monitor - September 2017

Greek Fixed Income Monitor: Upcoming third review curbs bond market momentum

Following a significant increase in June, the Government Bond Index fell in July to 511.83, thus recording a marginal decrease of 0.24% compared to the previous month, and remained stable at this level until the end of August. Even so, the stabilization of the economy combined with the fading uncertainty led to significant gains of the Index by 15.2% since the beginning of the year.

The successful completion of the second review as well as the expectations of improved liquidity conditions and a better macroeconomic outlook pushed the 10-year spread in July down to 485 bps. Still, the Greek spread climbed to 518 bps in August, mainly due to expectations about the third review and the extent to which it could affect the current economic environment.

Despite the fact that economic uncertainty, the amount of non-performing loans and tight fiscal policy continue to hamper the growth path, the main risk in the scenario for gains on the government bond market in 2017 is the progress of the third review over the next three months. From this perspective, the disagreements about government debt and banks' capital adequacy between the IMF and its European partners do not seem to have been bridged, and there are chances of new frictions that will boost uncertainty in the Greek economy. Possible delays in the implementation of the aforementioned process are expected to revive political risk scenarios, which might reinforce the cautious attitude of investors.

The Corporate Bond Index continued its upward path over the past two months, as markets draw in corporate bond issues to improve the real return on their asset holdings. This development is evident from the upward trend of the Index, which has grown by 5.38% since the beginning of the year. In the last two months, the Index recorded a significant rise from 131.2 points at the end of June to 133.7 points in August. Furthermore, the average yield to maturity declined by 44 basis points in July and 16 May in August, indicating the increase in demand for this type of investment.

Next to the capital controls that are still in place for the Greek economy, an equally important factor that relates to this upward trend are the relatively high coupons offered by Greek corporate bonds compared to other forms of investment. In particular, the bonds included in the Index have a weighted average coupon of 4.5%, while the weighted average maturity is less than 4 years.

Despite the market shift towards corporate bonds, the capitalization of our Index bonds remained stable in recent years. For example, since August, aggregate funds in corporate debt rose marginally by no more than €70 million (1.07%) compared to the same month two years ago. A key factor driving weak supply is that the bond capital offered via new issues is notably small. For example, the issue of OPAP's bond only accounts for 3% of the existing aggregate corporate debt, while the bonds of Housemarket, Sunlight and Terna Energy do not exceed 1% of total debt. However, on the demand side, things are different. Indicatively, in July the 5-year bond of Terna Energy with its 3.85% coupon rate was oversubscribed by 2.7 times, thus largely exceeding the requested amount of €60 million.

Further strengthening of demand for Greek corporate bonds is expected to boost issuance activity by the end of 2017, provided that the improvement of the economy’s macroeconomic environment continues.