SIGNS OF RESILIENCE IN THE GREEK BOND MARKET AND INVESTMENT GRADE EXPECTATIONS
The Greek government and corporate bond market remains resilient, driven mainly by the strong dynamics of the Greek economy, amidst the tight monetary policy of the European Central Bank and uncertainty about economic activity in international markets. With Greek elections being finalized and the markets already discounting expectations for a rating upgrade to investment grade before the end of the year , the Piraeus Bank Government Bond Index saw significant upward movement, strengthening by 4.7% to 600 points in the second quarter of 2023. In particular, the index’s gains appeared significantly strengthened after the first election contest on May 22, as a high number of transactions took place in the government bonds market, amounting to €260 million and the strongest daily upward movement, with the Government Bond Index recording a drop in the weighted average yield by 14 basis points (bps) to 3.65%. In the April–June quarter, the weighted average yield of the index decreased by 29 bps to 3.62%, while characteristic of the strong upward trend was the historic low recorded in the spread of the Greek and Italian 10-year yields, reaching -50 bps in mid-June.
Indicative of the bond market climate is the expectation for a change in the Greek economy’s credit rating to investment grade within the latter half of the year, with the credit rating agencies anticipating an improvement in the Greek economy’s economic prospects. In particular, S&P upgraded the outlook of the current credit score of BB+ to positive at the end of April, as it noted an improvement in fiscal and structural reform dynamics despite the rising interest rates and the technical slowdown in the Eurozone economies. Accordingly, Moody’s expects that Greece is close to investment grade but will need more time to be rated accordingly, which is reflected in the current lower credit rating from this particular rating agency. Fitch, although closer to an investment grade rating, kept the outlook stable on June 9, probably due to the second election contest at the end of June.
Despite the favourable climate created by credit rating agencies, both the credit default swaps market and the government bond market appear to have already discounted the change to investment grade. Specifically, in the April–June quarter, a strong upward movement was recorded, with the yield of the benchmark 10-year bond decreasing by 53 bps to 3.67%, the lowest level since the end of 2022. The fall in bond yields was accompanied by a significant narrowing of the spread between the Greek 10-year and the German 10-year bonds, which recorded a quarterly drop of 66 bps, reaching 128 bps at the end of June. In addition, the “fair” value for the level of the spread according to the relative macroeconomic readings of the two countries is estimated at 147 bps, with the implied risk balance tilting upwards according to the relevant index, while valuations appear expensive but to a milder degree.
On May 17 , the robust momentum in the Greek bond market so far led the Public Debt Management Agency (PDMA) to raise €400 million from the reopening of bonds maturing in June 2033 and January 2037. The 10-year bond with a 4.25% coupon was sold at a yield of 3.97%, while the 15-year bond with a 4% coupon recorded a yield of 4.14%, with investor demand adding up to €2.18 billion. The PDMA also proceeded with a reopening for the bond maturing in 2042 and raised €200 million in mid-June with a 4.2% coupon only through market makers, with the offers reaching €1.23 billion and the yield 3.99%, significantly higher than the auction one year ago on May 30, 2022 . In July, the PDMA took advantage of the positive climate for a new bond issue amounting to €3.5 billion and maturing in July 2038, which attracted the interest of investors hence recording a coverage ratio of 3.89 and a yield of 4.46% . The issuance of the 15-year bond was accompanied by a swap offer for the bonds maturing in 2024 and 2025, and the amount from the bond exchange was €1.8 billion. Finally, on July 19 , there was a reopening of €250 million for the 5-year bond maturing in 2028, with a coupon of 3.875% and with the requested amount covered by 4.18 times and the yield set at 3.3%.
In the corporate bond market, the Corporate Bond Index moved upward, showing, however, a slowdown of its previous dynamics in April and May. In particular, the index recorded an increase of 1.9%, reaching 140.3 points at the end of June. Accordingly, the index’s weighted median yield fell by 21 bps in the April–June quarter to 4.53%. In addition, the market positively received the government’s imminent intervention to abolish the 15% tax on income from corporate bonds, a move which, in combination with the eventual realization of the investment grade rating status, is expected to strengthen the demand for corporate issues, beginning, from the supply side, with Mytilineos issuing a 7-year bond with a 4% coupon and raising €500 million with a coverage ratio of two times the requested amount. Expectations for an upgrade in the government debt credit rating also spilled over to the corporate bond market, with S&P increasing the credit rating of OTE to BBB+.