ECB’S CRISIS CONTINGENCY PLAN SUPPORTS THE GREEK BOND MARKET
The downward trend of bonds in international markets, uncertainty over economic activity and persistent inflationary pressures continue to push the Greek bond market downwards for a fourth consecutive month. Indicatively, the Government Bond Index of Piraeus Bank recorded a fall of 0.69% at the end of March, dropping to 628 points, while the average yield of the index increased by 11 basis points (bps) to 1.91%. Moreover, in the first week of April, the index recorded gains, with its yield reaching 1.88%; however, these were offset in the next week, with the yield reaching a 52-week high of 2.06% (08/04/2022).
In detail, the 10-year yield increased by 14 bps to 2.65% in March, with a similar increase recorded for the medium-term part of the yield curve (2–5-year). Evidently, the bond yields at the short end of the yield curve passed to positive levels after almost a year of negative yields, which is indicative of the end of the PEPP programme in March. However, it is worth noting that the increase in yields led to the normalization of the curve rather than to a massive increase in borrowing costs. An important supporting factor is the markets’ expectations of the ECB’s readiness to draw up a contingency crisis plan in the event of a rapid rise in the Eurozone’s government bond yields.
According to the results of our statistical evaluation model for the 10-year Greek spread, the bond markets seem to have priced in the fundamental figures of the Greek economy relative to those of Germany. Despite the downward revision of the GDP reading for 2021 and the possible impact of inflationary pressures on economic activity, the narrowing of the 10-year spread at the end of March by 26 bps to 212 bps is justified by relative economic activity, competitiveness, fiscal flexibility and market risk-taking trends. In particular, the statistical model for evaluating the level of the spread indicates a fair value of 191 bps. However, it is important to note that according to the same quantitative analysis, the probability of a widening spread has increased significantly and now outweighs the possibility of a decrease in the 10-year spread. Specifically, the Risk Balance Index moved to a positive reading for the first time in 14 months, reflecting increasing downside risks for Greek bonds.
Expectations of an improvement in the credit rating of Greek debt towards investment grade at the beginning of next year were reassessed according to the new developments on the international scene, with Moody’s maintaining its credit rating and DBRS upgrading its rating from BB to BB (high) but downgrading the outlook to stable. Nevertheless, the credit rating priced by the CDS markets continues to be above investment grade, while its deviation from the rest of the EU periphery countries has increased marginally.
The Corporate Bond Index moved marginally lower in March, with some signs of slight recovery in the first two weeks of April despite the deterioration in the economic climate indicators and the PMI index in manufacturing. Specifically, the index recorded a month-on-month loss of 0.69% at the end of March, dropping to 140.4 points. Conversely, it recorded a small upward movement in the first two weeks of April, reaching 140.8 points in the middle of the month. The weighted median yield of the index at the end of March closed at 3.51%, having increased by 11 bps compared to the previous month, with the largest losses recorded in the bonds of Frigoglass (maturing in 2025), Intralot (maturing in 2024) and Coca-Cola (expires in 2031).