MARKETS

Huge pressure on state bonds

Greek yields head sharply higher as concerns grow and investors reassess their portfolio risks

Huge pressure on state bonds

The eurozone bond sell-off continued on Monday, following the swing in European Central Bank policy at last week’s meeting that has led investors to review the risk level of their portfolios.

The yield of the Greek 10-year benchmark bond climbed on Monday to 2.5 percentage points, showing a 12% increase and rising to its highest point since April 2020. The spread over the German 10-year bund came to 232 basis points, while last summer it was below 100 bps. There was a smaller rise for the Italian (5.7%) and the Portuguese 10-year bond yields (5%).

Analysts attribute the stronger pressure on Greek bonds to the size of the Greek market and the fact that Greece has a high national debt and is not rated investment grade, which means that a cautious fiscal policy is more important than ever for this government.

ING Senior Rates Strategist Antoine Bouvet notes to Kathimerini that that the greater sell-off of Greek bonds is due to the Greek market being smaller, thereby being more vulnerable to liquidity fluctuations.

Banking sources add that as investors reassess their risks, they place more pressure on the bonds of countries with higher debt and which are therefore more vulnerable, such as Italy and Greece – i.e. the countries that have benefited most from ECB support during the pandemic.

Greece is the sole eurozone country rated below investment grade, and theoretically carries the highest risk. Scope Ratings warned yesterday that Greece’s credit rating faces challenges such as the high public debt stock, which represents a weakness as markets reassess the risk related to increased inflation, the gradual normalization of ECB policies and the debt sustainability of vulnerable countries.

Nevertheless analysts point out that the ECB has an instrument that will have a strong impact toward reducing the spreads – especially those of Greece – and that is the bond reinvestment program. That will apply as of the second quarter of the year, after the current bond buying program (PEPP) has ended.