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Greek Fixed Income Monitor – June 2018

The decisions in the Eurogroup on June 21st and the completion of the third economic program proved to be positive for the bond market, where the previous month losses were offset and the high volatility was stabilised. Following the grace period of €96.4 billion worth of Greek debt by 10 years and the relatively high cash buffer of € 24.1 billion gives significant support to the Greek debt over the medium term signaling a possible new issue by the Public Debt Management Agency (PDMA) over the next months.

As a result of the aforementioned decisions, Piraeus Bank Government Bond Index reached 492 units at the end of June recording an increase of 4% over the previous month. Correspondingly, the weighted average YtM of the Index fell by 72 bps reaching 3.8%.

The measures decided in the latest Eurogroup meeting improve the access to private bond markets but an extended bond issuance program does not seem to be straightforward as debt levels remain high and Greek yields differ significantly from those of its European counterparts in the south. In particular, the spread of the Greek 10-year government bond stood at 365 basis points in June, about 128 bps higher than the spread of the corresponding Italian bonds.

The factors that could motivate markets for higher valuations (lower borrowing costs) are found in the evolution of Greek debt ratings as well as the prospect of joining the ECB's bond purchase program. S&P upgraded Greece’s sovereign rating at B+ from B with Stable outlook. The other two main rating agencies are expected to follow this upgrade, however the current credit rating is at least 4 notches away from the “Investment Grade” classification.

The external risks to the Greek bond market continue to be traced back to tensions in international trade relations as well as to increasing investor risk aversion, which is indicative of the sentiment, especially in emerging markets.

In corporate bonds, the picture is not as positive as it is with government bond issues. In particular, the Corporate Bond Index signals a reversal of the upward trend over the past months following the increasing uncertainty over Intralot.

Indicatively, since May 8th and during the events concerning Folli Follie, Intralot's two bonds maturing in 2021 and 2024 recorded losses of 14% and 20.4%, respectively. As a result, the Corporate Bond Index declined by 0.82% reaching 133.6 points at the end of June, as the two issues represent about 10% of its total composition

Despite the slowdown of the negative dynamics of the corporate index in mid-June, the technical picture remains negative, with pressures continuing in the short term.

In addition to pessimistic market valuations regarding Intralot, the negative dynamics of the index may also reflect the increasing risk aversion from international investors over non-investment grade bonds within the overall risk-off trend due to global policy uncertainty and escalation of trade disputes between the US and its traditional trading partners.

In June, there was no significant drop in expectations as PMI remained above the 50 points level to 53.5 from 54.3 in the previous month as well as the Economic Sentiment Indicator (ESI) recorded a small correction of -1.6% from 104.2 points. We should note that Eurogroup’s decisions are not reflected in the respective indicators.

Within this climate, the low subscription of 1.04 times for the new bond issue of B&F worth €25 million with a coupon of 4.95% and maturity in June 2023 is not surprising.