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Bond price rally illustrates change of climate

By Sotiris Nikas

The yield on the Greek 10-year bond dropped to its lowest point in 30 months on Tuesday on the back of positive developments concerning Greece in the last few days.

Since last week, the Finance Ministry has embarked on a series of contacts with hedge funds and major foreign banks aimed at illustrating the work that has been done, along with the importance of recent eurozone decisions for Greece, the realistic character of the targets set for the near future and, above all, the government’s determination to implement the streamlining program.

According to sources, besides talks with hedge funds, there have also been contacts with Morgan Stanley and Goldman Sachs. Morgan Stanley subsequently published an analysis on Monday mentioning that the Greek economy is entering a reorganization phase. A Goldman Sachs report is also expected in the coming days.

These positive developments have led to a mini-rally in the prices of Greek bonds, reducing both the yield and spread compared to the benchmark German bund. Since last Wednesday, foreign investors have proceeded to large purchases of Greek bonds, resulting in 10-year bond spread dropping by 134 basis points and yield by 1.214 percent, while the price has grown by 5.1 basis points.

The Greek bond rally was sparked by the announcement of the bond buyback program in early December. That led credit information specialist CMA, which calculates countries’ chances of defaulting on their debts, to leave Greece out of the list of countries examined in this quarter’s report. That was not because the risk has been completely averted, but, as CMA analysts explain, because the rapid change of climate in the Greek bond market would not lead to a safe conclusion regarding the precise percentage in terms of the chances of a Greek default.

Nevertheless, the same analysts note that after the recent eurozone decisions to support Greece and the successful completion of the buyback program, fears of a Greek exit from the euro have diminished, which means that the possibility of a default is far smaller. Today, the country most likely to go bankrupt is Argentina (61.4 percent), followed by Cyprus (60.5 percent).

The positive news for Greece also includes Monday’s decision by the Eurogroup for the disbursement of a 92-billion-euro bailout tranche, which illustrates both that Greece is adhering to the program set out with its creditors and that the eurozone is now responding to its obligations without delay. Foreign banks and hedge funds have also discerned that Greece intends to proceed with its privatizations program even though there are still a number of problems.

As a result the yield on the 10-year bond dropped to 10.425 percent on Tuesday. The last time it was at such levels was on July 15, 2010, when it stood at 10.43 percent. On March 8, 2012 it had climbed as high as 39.85 percent – its peak. The spread with the German 10-year bund dropped on Tuesday to 883.8 basis points, registering a 280-month low. Its peak also came on March 8, 2012, when it amounted to 3,803.9 points. At the start of the crisis, on August 10, 2009, it had been at its minimum point of the last four years – 108.3 points.

Prices have climbed to 54.6 points and reached levels unseen since May 2011. Their lowest point was last June, at 13.483 points, as the uncertainty about the country’s place in the eurozone peaked.

ekathimerini.com , Tuesday Jan 22, 2013 (23:07)  
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