CONCERNS OVER GREEK CORPORATE BONDS
COVID-19’s effects on the Greek economy have included increased volatility in government bonds, significant losses in corporate bonds and uncertainty about economic recovery in the coming months.
In this context, a sharp decline was recorded in the Greek bond market in early March, with markets discounting the negative impact of COVID-19 on economic activity mainly through the tourism sector. However, the downward trend was reversed after Greek government bonds were included in the ECB 's bond buying program, resulting in the Greek Government Bond Index’s returning to near the previous month's levels. Specifically, at the end of March, the Index recorded a mild decrease of 0.57%, reaching 643 points. The weighted average yield to maturity of the Index recorded a downward trend in the last two weeks of the month of 1.53% but remained 31 basis points higher than February.
Regarding the individual bonds of the Index, the highest losses occurred for the bond maturing in 2025 (5-year), with its yield 74 bps higher compared to February, at 1,376%. Similarly, all bonds with maturities between 2022 and 2029 recorded losses, with the 9-year bonds (maturing in 2029) and the 3-year bonds (maturing in 2023) recording losses of 33 and 68 bps, respectively. The longer-term tenors did not show significant variability, with the 15-year bonds (maturing in 2035) recording gains of 11 bps compared to the previous month.
Significant widening in line with the European periphery was initially recorded for the Greek spread, with the German 10-year bond rising to 435 bps, mainly due to the movement of investors to the safety of German 10-year bonds in early March. However, after the announcement of the bond-buying program by the ECB, the 10-year spread declined to 215 bps, higher by 21 bps compared to the previous month. From our quantitative analysis of the effect of Greece macroeconomic fundamental factors that underline "fair" valuations for the 10-year spread, we observe that the relative slowdown in economic activity, the expectations for a recession during the year and the risk-off tendencies from international investors reflect mild pressures on Greek spreads and point toward a “fair” value at 234 bps.
The Corporate Bond Index reached a historic low in March, close to the levels recorded in July 2016. Moreover, the recovery in government bonds has not extended to the corporate bonds market. Specifically, the weighted average yield to maturity of the Index reached 9.56% at the end of March, recording losses of 410 bps compared to the previous month. Although all bonds on the Index recorded significant declines, market nervousness about the effects of COVID-19 on tourism and transportation led to relatively higher pressures on Aegean’s, Attica Group and Intralot bond issues.
The slowdown in the Economic Sentiment Index to 109.4 in March from 113.2 in the previous month followed the general downward trend observed internationally in line with the forecasts of global and European economic activity. Similarly, PMI in manufacturing recorded a sharp drop from 56.2 to 42.5 points, below the 50-point level that separates contraction from expansion. Combined with the fatigue recorded globally in high-yield corporate bonds, further deterioration of economic climate indicators in the near future is expected to lead to further downward pressures in the Index's valuations if no measures like those in the government bonds market are taken.