Greek bonds registered a rally on Monday, despite the pressure on the rest of the eurozone, with Greece‘s borrowing costs reverting near 3%, having now retreated below Italy’s. Since mid-June, the yield on the Greek 10-year bond has declined by as much as 35%.
The approval of the new TPI tool of the European Central Bank works supportively for Greek government bonds, as this way Greece maintains the strong support of the ECB, which does not derail the upward trend of its credit ratings, with the aim of achieving investment grade in 2023. PEPP reinvestments, activated since the beginning of the month, also help to improve the image of Greek bonds.
Moreover, with Italy experiencing a new political crisis and the ECB’s monetary policy having “unfolded” – after the market overcame the initial shock of tightening – investors are now more coolly pricing and comparing country risks and prospects.
The yield of the 10-year Greek bond plunged 6.5% on Monday to 3.07 percentage points, the lowest since April, while the spread with the German bund fell to 202 basis points. On June 14, i.e. 24 hours before the extraordinary meeting of the ECB, the 10-year yield had reached 4.7% while the spread was at 305 bp.
In Italy, the 10-year yield strengthened on Monday to 3.5 percentage points (+1.1%) and the spread to 239 bp, Portuguese and Spanish bonds came under similar pressure, while the German 10-year yield rose by 5%, to 1.071 percentage points, due to fresh aggressive comments from ECB officials about upcoming rate hikes.
Christine Lagarde emphasized in an article that the board of directors will continue to raise interest rates as long as necessary to reduce inflation to its 2% target over the medium term. At the same time, she added that the ECB’s decision at the September meeting will depend on the incoming data.
Meanwhile, ECB Governing Council member Martins Kazaks said the ECB may not be done with big rate hikes, adding that one coming up in September should be “quite significant.”