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Greek Fixed Income Monitor – March 2018

Debt relief scenarios mark the start of a round of negotiations that will determine market attitudes in the coming months. In particular, scenarios refer to a combination of restructuring tools, such as: interest rate limits, maturity extensions, and debt repayment linked to economic activity and reform development, with the expected outcome being a 25% reduction in GDP over time. However, until the debt instruments are finalised, markets are expected to show volatility by gradually incorporating in their valuations the size of debt relief under alternative scenarios as well as the package of corresponding obligations (post-memorandum supervision).

Key dates are the IMF Spring Summit on 23 April and the Eurogroup meetings on 27 April and 24 May. 23rd April is an important date for yet another reason; the ratification of the 2017 fiscal figures, which the IMF is expected to take into account in its subsequent positions.

At the same time, the international investment environment has changed since December last year, with markets being particularly cautious with respect to the next steps until the programme completion in August. On the contrary, the yields on Greek bonds remain at attractive levels, a fact that is positive for bond valuations, as in any case, a drop in prices creates opportunities for new investors to enter at even better yields.

Consequently, and despite the international context of increased uncertainty, the Government Bond Index rose to 479 points, i.e.by 2.06% compared to the previous month. Correspondingly, the weighted average yield of the Index declined by 20 basis points to 4.05%, with further declines of up to 3.78% recorded in the first ten days of April. The 10-year bond spread (against the German 10-year bond) recorded a slight increase of 7 bps, reaching 382 bps at the end of March, i.e. reaching close to valuations implied by fundamentals of the Greek economy.

The Corporate Bond Index remained stable in March at 135.7 units with a moderate upward trend recorded in early April towards 136 units. Correspondingly, the weighted average yield of the Index remained close to 2.5%, i.e. slightly increased by 6 bps compared to February.

The recent fall in the economic climate index (ESI) in March may be responsible for the weak upward trend of the Index as it has recorded a small correction from its previous high levels. Specifically, ESI declined to lower levels in March, to 99.8 from 104.3 points, with weaker business expectations being more pronounced in the construction and industry sectors and less in services and retail.

Similarly, but with a relatively weaker decline, the PMI fell to 55 points from 56.1 in February, indicating that the manufacturing sector continued to expand in March. Growth in new orders, purchasing, and production declined as a result of high prices during February, but continued to grow at a strong pace. As a result, business confidence continued to improve in March due to forecasts for high levels of foreign demand.