Major foreign investment funds’ interest in buying Euro periphery state debt remains insatiable, keeping the prices of Greek sovereign bonds near their recent historic highs. There has been a small decline over the last few sessions, but market experts note that this development is natural after the rally sparked by the European Central Bank’s decision to adopt unconventional measures to relax its monetary policy.
“Greek bonds, just like the Spanish and the Portuguese, are absorbing their major gains from the recent period. However if there are any favorable catalysts from the flow of Greek macroeconomics, they may register new highs,” said a market professional.
So why are foreign funds even opting to seek out Greek treasury bills?
The answer is to be found in the negative interest rates that the ECB now charges on deposits. Hence even the 1.8 percent yield that the recent auctioning of 13-week T-bills ended up at in June proved to be particularly attractive. The Public Debt Management Agency drew 1.3 billion euros from the market, the amount was covered 2.99 times and some 3 billion euros was offered by Greek and foreign investors. At the six-month T-bill auction a week earlier another 1.625 billion euros was drawn with the yield dropping to 2.15 percent from 2.7 percent at the May sale, with offers exceeding 3.3 billion euros.
Last week the yield on the 10-year benchmark ranged between 5.9 and 6 percent, from 5.6 percent after the announcement of the ECB decision, and that of the five-year bonds issued in April ranged between 4.1-4.2 percent against an original coupon of 4.75 percent.
The general decline in the cost of borrowing for the Greek state constitutes a springboard for when the government decides to proceed with its plans to issue new bonds, possibly seven-or three-year debt. These two products, which are missing from the basket of Greek paper, are seen as necessary for reference issues and to put the Greek debt yield curve back on a normal course.
Foreigners continue to discern capital value in Greek bonds: Bank of America Merrill Lynch notes that, according to its data, the Greek bond yield spread against that of the German benchmark bund is at its lowest point since 2010. Commerzbank recommends an increase in positions on the periphery of Europe. Nicolo Piotti, managing director at Morgan Stanley Investment Management, told investors at a recent event in Athens that his firm currently has a preference for Europe and particularly the sovereign bonds of the periphery.
The great demand for bonds, which brings their yields down, is also based on their stubbornly high returns – at a time when central banks’ interest rates are in effect prohibitive for investments – and not so much on the fundamentals of the real economy; even more so in Greece’s case.
Nevertheless if the macroeconomic data confirm the assessments regarding a recovery and at the same time there appears to be a favorable conclusion (or even satisfactory progress) on the horizon regarding the negotiations with Greece’s eurozone partners about restructuring Greek national debt, then a fresh and even bigger rally cannot be ruled out.