Greece’s bonds beat peers on route back to market
By Anchalee Worrachate
Greek and Portuguese government bonds beat their euro-region peers this quarter as the countries made progress toward returning to international credit markets.
The Hellenic Republic’s bonds returned 23 percent, the best performance among 34 sovereign debt markets tracked by Bloomberg World Bond Indexes. The European Commission predicts the Greek economy will grow in 2014 for the first time in seven years, and the nation is now looking to start selling debt again next month after achieving a budget surplus last year. Portugal’s bonds are the next-best earners, gaining 12 percent, as the country moves closer to exiting its bailout program.
“There’s no doubt the levels of debt in these two countries are still high and there are still challenges ahead,” said Richard McGuire, head of European rates strategy at Rabobank International in London. “But investors looking for higher yields are rewarding them for reforms they pushed through, which are beginning to bear fruits.”
Investors are returning to fixed-income, currency and derivatives markets as the sovereign-debt crisis that nearly broke the euro shows signs of fading. European Central Bank President Mario Draghi has pledged to backstop the region by buying the bonds of distressed nations if they request aid. Purchasing Greek bonds the day of Draghi’s comments on July 26, 2012, would have earned investors a 439 percent return, according to Bank of America Merrill Lynch Indexes.
The average yield to maturity on bonds from Greece, Portugal, Ireland, Italy, and Spain dropped to the euro-era low of 2.35 percent on March 27, the indexes show.
In contrast, Finland’s bonds have delivered the smallest gains this year among 14 euro nations tracked in Bloomberg World Bond Indexes, earning 2.6 percent. That’s 1.4 percentage points less than the region’s average.
Greece set off Europe’s debt crisis in 2009 when the government revealed its budget deficit had ballooned to more than five times the euro area’s permitted limit. It received two bailouts and has been shut out of bond markets since March 2010.
The country is in line for a rescue payment of 8.3 billion euros ($11.4 billion) under the second bailout program as soon as this week. Alternate Finance Minister Christos Staikouras said on March 18 that the government had achieved a 2013 budget surplus before interest payments of 2.9 billion euros, more than its prior forecast.
Standard & Poor’s this month maintained Greece’s credit rating at B-, six steps below investment grade, saying the country’s debt remains large even as its fiscal performance improves. Its ratio of debt to gross domestic product is forecast by the European Commission to be 177 percent this year, the highest in the European Union.
“Fundamentally, things are better now than they were a few years ago, but these are still high-risk peripheral products and people expect high returns from them,” said Padhraic Garvey, head of developed-market debt strategy at ING Bank NV in Amsterdam.
The rate on 10-year Greek bonds dropped to 6.63 percent as of 8:57 a.m. in London from a euro-era high of 44.21 percent in March 2012. The extra yield on the securities compared with benchmark German debt narrowed six basis points to 5.07 percentage points from a record 42.4 two years ago.
Greek government-bond trading on the electronic secondary securities market, or HDAT, increased by more than 270 percent in the first quarter compared with a year ago, data from the Bank of Greece showed. Turnover this year through March 24 was 981 million euros versus 267 million euros in the first three months of 2013, the central bank said on its website.
That said, Natixis Asset Management, which oversees the equivalent of about $405 billion, prefers Portuguese securities.
“We have a long position on Portuguese bonds but don’t own Greek bonds as we still see it as a default case,” Axel Botte, a Paris-based strategist at Natixis said in a telephone interview on March 28. “Portugal did a successful syndication in January and they are ahead of their schedule in terms of funding. It also ended last year with excess cash at the treasury level. We like the progress they’ve made.”
Portugal is scheduled to exit its international bailout program in May. A rally in its government bonds pushed 10-year yields down by 1.50 percentage points to 4.03 percent since the start of the year. While it’s held two sales of bonds via banks this year, Portugal has yet to arrange an auction as it waits for the market to stabilize at lower yields.
The nation is on track to restore full market access, Paul Thomsen, deputy director at the International Monetary Fund’s European department, said in Lisbon on March 12.
The Bank of Portugal revised its forecast for the economy on March 1, saying it will expand 1.2 percent this year after declining 1.4 percent last year. It had previously forecast growth of 0.8 percent.
“These countries have got themselves into a virtuous circle,” said Rabobank’s McGuire. “Falling yields incentivize Greek and Portuguese governments to attempt to finance themselves via the capital market and this adds further momentum to the bullish trend of their own bonds.”