RETURN OF VOLATILITY IN THE GREEK BOND MARKET
Investors’ efforts to assess the impact of Covid-19 on the global economy have laid the groundwork for months of high volatility in financial markets. Against this backdrop, the market’s risk-off stance and low interest rates are expected to determine the evolution of Greek bond yields and the degree of difficulty that the Public Debt Management Agency will implement in its issuing activity plans.
In general, Greek government bond prices went up in February, although a sharp drop occurred in the last week of the month. Specifically, in the middle of the month, the Piraeus Bank Government Bond Index hit a new high of 664.2, with the average YtM falling below 1% for a short period. Subsequently, the average yield was 1.22% at the end of February, with losses surpassing 15 basis points (bps) mainly in the short- to medium-term (6 months–7 years) parts of the interest rate curve.
Significant increases were also recorded for the Greek 10-year spread, which rose 33 bps to 194 bps largely because investors moved to the safe haven of German 10-year bonds, the yields of which recorded a significant decline of 17 bps by the end of February, finishing at -0.61%. According to the fundamentals of the Greek and German economies, Greek spread valuations currently justify a ‘fair’ price of nearly 131 bps. Note, however, that the impact of the virus on economic figures has not yet been disclosed. Although the model's valuations support the fact that spreads are cheap, the volatility of valuations has substantially increased mainly because of widening spreads in European high-yield bonds and the drop in investors’ risk appetites. In addition, according to the Balance of Risks Index on the Greek bond market, the likelihood of further increases in the Greek spread (upside risk) have increased significantly compared to previous months.
The Federal Reserve’s sharp interest rate cuts of early March and expectations that other central banks will follow its lead are expected to favour Greek government bonds when ‘search-for-yield’ trends re-emerge. However, this development will only be accompanied by greater investment risk.
Following activities on international financial markets, the Piraeus Bank Corporate Bond Index declined. Specifically, international developments led the index to drop by 2.05% to 135.7 points at the end of February. The index's weighted average yield rose significantly by 156 basis points in February relative to January, surpassing 5%.
As a result, the likelihood of new corporate bond issuances in the short term moderated, as borrowing costs have reached historically high levels and market volatility has increased. With market interest shifting from the U.S.-China trade war, some of the key factors that will determine trends in the domestic corporate bond market over the next year include weak economic growth in the Eurozone, increased geopolitical risk and the impact of Covid-19 on tourism, exports and private consumption. However, the effects of these factors are not fully priced-in at the current time.
An indication of the current climate of uncertainty is that, in contrast to concerns in the corporate bond market, the manufacturing PMI and the ESI economic climate indices have improved, while OECD economic climate indicators have also recorded increases. Specifically, in February, the Economic Sentiment Index increased by 3.4% to 113.2 points, while the PMI rose to 56.2 from 54.4 points in January. The strengthening of the above indicators shows the positive momentum of the Greek economy in the recent period but does not account for developments that appeared at the end of February. As a result, we do not expect that these levels will change during the next period.