piraeus bank group

Greek Fixed Income Monitor – Μay 2018

The short turmoil on the political scene of the Eurozone due to Italy’s inability to form a government and Spain’s censure motion affected the Greek bond market with Piraeus Bank's Government Bond Index recording losses of 4.11% at the end of May compared to its value in the previous month.

In particular, the Index reached 466 points (29th May) immediately after the difficulty of forming a government by the Italian president. In the aftermath of reassurance, the Index returned to 473 points in the following days, however, it remained lower than the end of April (493 points), with the weighted average yield of the Index remaining at high levels at 4.34%

The 10-Year spread of Greek Government Bonds is significantly influenced by movements in the spreads of the other European countries. With the rest of the fundamentals not showing significant changes compared to Germany, the markets focus on the risk premium from the economic policy needed by the countries in the South in contrast to the policy direction envisioned by the countries of the European North.

In conclusion, this highly volatile and uncertain scenery in Italy and Spain has a negative impact on international risk appetite, despite the positive performance of the Greek economy. In particular, the 2-year and 5-year bond yields are now at 1.4% and 3.9% respectively, while the 10-year yield at 4.6% increased by 70 bps compared to early May. Within this risk-off setting, it is likely that the Greek government will continue the efforts to increase its cash surpluses through institution funding and rationalize the management of the public sector's reserves by shifting the plans for new bond issues in the near future .

Despite the signs of a recovery in the economy with GDP growth recording a 2.3% annual rate, according to ELSTAT, international developments are exacerbating concerns in bond markets. Given that the dynamics of economic growth stems from the export of goods, it is reasonable to assume that the international environment is an important underlying factor in economic activity. Therefore, the downward revision of Eurozone forecasts, increased geopolitical risks and trade protectionist tendencies constitute important downside risks for the Greek economy and the Greek bond market.

The uncertainty that characterizes the Greek financial market due to the IMF and Germany's disagreement over the debt relief mechanism and the political developments in the Eurozone; further increased as the Follie Folli case and Pangaia’s decision to postpone the € 400 million bond have interrupted the upward trend in the corporate bond market.

In particular, the Corporate Bond Index declined to 0.7%, reaching 134.7 points at the end of the month. Accordingly, the weighted average yield of the Index increased significantly by 51 basis points in May compared to the previous month, surpassing marginally the 3% level.

The technical outlook of the Index shows that the short-term downward trend of the index tends to lose momentum. Nevertheless, June is a month of key developments both in the domestic and international investment environment, therefore a further increase in volatility cannot be ruled out.

However, market expectations are more positive as the Economic Climate Index (ESI) recorded a small increase of 0.6% to 104.2 at the end of May. Specifically, the improvement that led the Index towards its February level is due to the Retail Trade and Construction sectors , while uncertainty remains high for the coming months. An improvement was also recorded in PMI that increased by 1.3 points to 54.2 at the end of the month.