The Greek bond rally that has brought the benchmark 10-year note’s yield to its lowest level since 2005 has analysts divided, with Societe Generale recommending the acquisition of Greek debt and UBS urging caution with a “sell.”
Either way Greek bonds remain at the focus of the markets, with investors anticipating a fresh issue in the next few days after last Friday’s rating upgrade by DBRS, which came to settle some of the frustration in Athens from Standard & Poor’s decision to refrain from an upgrade.
The most likely scenario for Greece’s next market foray is the sale of a new seven-year bond, aimed at drawing a relatively small amount, of about 2.5 billion euros.
For Societe Generale, a new Greek bond issue would constitute an investment opportunity. It noted that the good news for Greece is not just that is has a huge cash buffer, but also that there is significant scope for further reforms and far higher growth prospects in the long term if the next government makes the right decisions.
Although an international appetite for risk has been the main factor spurring the Greek bond rally to date, the prospect of a further improvement is important – especially when more investors acquire Greek debt – as that will lead to new credit rating upgrades.
Nevertheless, UBS appears much more cautious, arguing that the Greek rating’s advance to investment grade remains elusive. It is even more reserved on Greek bonds as it believes that the country continues to face important challenges. The recent fiscal surprises are expected to lead to further rating upgrades, it says, but adds that the country is unlikely to rise above the BB level in the next 12 months.
Greece may have tapped the markets twice this year and built a sizable cash buffer, but UBS recommends that its clients should “sell” Greek bonds as it believes the Greek debt will remain unsustainable without any new measures in the long term.