piraeus bank group

Greek Fixed Income Monitor – January 2018

The year started with important events for the Greek bond market, that boosted the interest in Greek government bond issues. The completion of the third review at the Eurogroup on 22nd January, S&P’s credit rating upgrade to B (with a positive outlook), the expectations of a recovery in the economy, and the attractive bond yields compared to the rest of the European region are the main pillars of the upward rally in government bonds.

In January, the government Bond Index continued its upward trend as it was 28 points higher than the 469 level recorded last month. Accordingly, the average yield to maturity of the Index continued its downward path with the aim of convergence at a level close to EU periphery countries reaching 3.63%, i.e. 36 bps lower compared to the same month last year.

As a result, the yield of the 10-year bond fell by 65 bps, with its spread relative to the German 10-year yield reaching 304 bps at the end of the month.

A significant risk to Greek bond markets is the impact of international markets and investment uncertainty on their returns. As a result of the volatility on international stock exchanges in the first week of February, the Greek Public Debt Management Agency (PDMA) responded by rescheduling the issuance of the new 7-year bond. Still, the subsequent issue of the bond was satisfactory, given it’s 7-year maturity, as primary market’s bids reached almost €7 billion, or more than twice the requested amount. Additionally, bond pricing on the primary market stood at 3.5%.

In an environment of forthcoming revisions to the ECB's monetary policy and gradually strengthened inflation expectations, a spillover effect might also become visible in the Greek bond market as the borrowing cost of corporate debt could increase. However, the impact of this effect will depend on the sensitivity to interest rates, the credit rating and current valuations of Greek bonds compared to similar European issues. In particular, the index's long-term interest rate sensitivity is on average 2.4 compared to 4.6 for the European high yield index, while Greek bond valuations are still less expensive compared to those of the European market.

In this context, the Corporate Bond Index continued to rise steadily in January as it moved upwards by 0.65%, reaching 135.8 points from 134.9 points over the previous month. The weighted average yield to maturity on corporate bonds at the end of January closed at 2.42%, decreased by 178 basis points compared to the previous month.

The upward trend of the Index is also supported by the economic expectations of the Greek economy. Specifically, the PMI for Greek manufacturing recorded a high of 55.2 units since the beginning of its conception (28/2/2015), while the economic climate index (ESI) increased by 0.6 points compared to the previous month, reaching 101.9 points.