GREEK BOND MARKET EXTENDS ΙTS LOSSES
Greek bonds continued their downward path in May as investors were called to price the prospects regarding economic activity of the Greek economy amidst a significant level of uncertainty and a persistently inflationary environment. However, the anticipated exit of the country from the enhanced supervision program at the end of August, the increase in liquidity from the recent targeted debt auctions of the Public Debt Management Administration (PDMA) and the favourable – in terms of sustainability – profile of the government debt structure so far protect the market from an increase in bond yields. Specifically, the government bond market recorded lower losses compared to April, with the Piraeus Bank Government Bond Index recording a fall of 2.42%, to 589 points. Respectively, the average yield to maturity of the index continued to move higher, reaching the level of 2.74%, 24 basis points (bps) higher than at the end of the previous month.
The estimated interest rate curve recorded an upward shift in its long end, with interest rates for maturities of 10–25 years recording an average increase of 53 bps, while no significant changes were observed for the medium-term maturities. In addition, the credit risk as reflected in the spread between Greek and German 10-year bonds recorded a slight increase of 5 bps to 245 bps bolstered by the submission of a parliamentary bill regarding interventions by the PDMA in the secondary bond market if certain conditions are met. Similarly, reports regarding a plan to protect against Eurozone bond market fragmentation in the event of a sell-off kept the Greek spread at relatively low levels.
According to the results from the 10-year spread quantitative model and despite the upward trend since September 2021, the markets seem to underestimate the economic fundamentals of the Greek economy relative to those of Germany. More specifically, the robustness of the economic climate indicators (Economic Sentiment Index increased by 3.5 points, to 108.6) as well as the positive surprise in the real GDP release in the first quarter of 2022, at 7%, are not in line with the current level of the 10-year spread. From our estimates, the spread level justified by the relevant economic activity, competitiveness, fiscal flexibility and market risk-taking is of the order of 200 bps. However, the risk of the spread widening remains significant with the Risk Balance Indicator remaining at a positive (bond-negative) level.
The Corporate Bonds Index also declined in May, decreasing by 0.63% on a monthly basis, reaching the level of 138.8. On an YtD basis, the index is expected to close the year lower as in the first five months of 2022 it has already fallen by about 6%, the highest drop over the last seven years. Respectively, the weighted median yield of the Index has decreased to a two-year historically high level of 4.2%. As a result, corporate lending costs rose by 55 bps in May to 136 bps, adding extra difficulty in issuing new corporate debt. In contrast to the environment of rising borrowing costs, LAMDA Development is planning a new corporate bond issue worth €200 million by early July depending on market conditions.