PERSISTENCE OF NEW HISTORICAL HIGHS FOR GREEK GOVERNMENT BONDS
The Piraeus Bank Government Bond Index continues to record new historical highs at 688 points, with its trend strengthening significantly in the first ten days of October against the background of the continuous increase of cases and geopolitical risk in the Eastern Mediterranean. In particular, the index recorded an upward trend in September, recording gains of 1.26%, with the upward move continuing in the first week of October. Accordingly, the weighted average yield to maturity of the index decreased by 9 basis points (bps) compared to the previous month, reaching 0.82%. Significant gains were also recorded in the first week of October for the 10-year bond compared to the end of August, with the yield falling below 1%.
The favourable climate in the government bond market is also evident from the interest rate curve at the end of September, with de-escalation of borrowing costs in the medium- and long-term parts of the curve. Regarding the Index’s individual bonds, the largest change in yield was recorded for bonds maturing in 2037 (16-year), which was found to be 24 basis points lower than the previous month, reaching 1.26%. Likewise, bonds maturing in 2042 moved similarly, recording gains of 21 bps at 1.405%.
The decline of government bond yields, however, was accompanied by a lower degree of deterioration in the sovereign credit risk approximated by the spread of Greek 10-year yield relative to the yield of 10-year German bonds. Specifically, the Greek 10-year spread increased in September by 5 bps to 154 bps compared to the end of August. It should be noted, however, that despite the relative deterioration of the fundamental factors of the Greek economy in relation to those of Germany, the Greek bond market shows a disconnection from the valuations of the statistical model based on the relative fundamentals of the two countries due to the positive premium from the PEPP programme of the European Central Bank (ECB). Indicatively, the estimate for a ‘fair’ spread increased to 309 bps at the end of September, if the ECB bond-buying programme is not taken into account, while the PEPP programme is estimated to have pushed the current valuation by 147 bps towards 162 bps.
The Corporate Bonds Index also moved upwards in September, reaching 134.9 points—an increase of 1.51%. The average yield of the index reached 2.65% at the end of September—a drop of 12 bps. The main factor that led to this move is the market stimulus originating from demand for government bonds, as there was no corresponding de-escalation of the credit risk spread in high-yield bonds in the Eurozone, and economic climate indicators remained at low levels. Specifically, the spread of credit risk in the European bond market increased in September by 6 bps to 125 bps compared to the previous month, while the ESI index decreased by 1.3% to 89.5 points. Respectively, the increase in PMI in manufacturing was marginal, moving from 49.4 to 50 units in September.
Despite the upward trend recorded in recent months, it is interesting that the Greek corporate bond market has not shown the strength corresponding with that of government bonds nor with that of similar bond indices in international markets . In particular, since the beginning of the year, the index has decreased by 2.1%, while Barclays’ high-yield bond index recorded a positive return of 3.7%. This highlights a cautious market stance on Greek corporate bonds due to both the occasionally high volatility of certain member companies in the index and the €13-billion support by which the ECB bolstered government securities. Another round of dovish monetary policy may also affect the Greek corporate bond market by reducing the borrowing costs of corporate issues. However, the degree of impact will depend on the investment grade, the sensitivity to policy rates, and the current valuations of Greek bonds in relation to comparable European issues.