Greek bond yields below 10% signal increasing confidence

With borrowing costs at the lowest level in more than 2 1/2 years, Greek bonds signal increasing confidence the country is stemming the financial turmoil that triggered the euro region’s sovereign-debt crisis.

The yield on Greece’s bonds due in February 2023 closed below 10 percent on May 3 for the first time since October 2010 amid signs the nation has taken steps to tackle its fiscal deficit. The securities have rallied along with the debt of Spain, Italy and Ireland, as central banks in Europe, the U.S. and Japan have pursued accommodative monetary policies, fueling demand for Europe’s higher-yielding government debt.

“The Greek move is a standalone move,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “Hedge funds are getting involved after the stabilization and the slightly better-than-expected news on finances and privatizations in the last month. However, the market is highly illiquid and I don’t think it would take much to push it around.”

Greece’s 10-year bond yield slipped 28 basis points to 9.73 percent at 1:43 p.m. London time. The price of the 2 percent security due in February 2023 was at 58.495 percent of face value. The rate dropped 162 basis points, or 1.62 percentage point, to 9.80 percent during the week through May 3, the biggest decline since the period ended Dec. 7.

The 30-year bond yielded 8.51 percent, matching the least since February 2011.

The last time Greek 10-year yields closed below 10 percent was on Oct. 26, 2010. By then, borrowing costs were rising after the nation sparked Europe’s sovereign-debt crisis in 2009 by saying its deficit was bigger than previously thought.

Trading of Greek government debt through the electronic secondary securities market, or HDAT, totaled 59 million euros ($77.4 million) last month as of April 25, compared with 80 million euros for the whole of March, data from the Bank of Greece show. Trading slumped to zero in October 2011 from a peak of 136 billion euros in September 2004, the data show.

The 10-year yield reached as high as 44.21 percent before private bondholders agreed to write off more than 100 billion euros as part of a restructuring of the nation’s debt in March 2012. The nation agreed in December to pay 11.3 billion euros to buy back 32 billion euros of bonds, reducing its debt burden.

In order to cover pensions and wages, Greece is reliant on loans from the European Union and the International Monetary Fund that were agreed to as part of 240 billion euros of international bailouts in the past three years. The government and international creditors reached an accord April 15 on conditions required to receive more aid, including the firing of state workers and the extending of a property tax paid through electricity bills. That paved the way for the disbursement of the 2.8 billion euros remaining from a previous review.

Greece expects approval for the next tranche of 6 billion euros on May 13, Finance Minister Yannis Stournaras said on April 27. The funds will enable the government to pay a bond held by the European Central Bank that matures on May 20.

Greece needs to avoid across-the-board budget cuts that disproportionately hurt pensioners and employees as it moves into the next phase of its bailout and tries to restore growth, the IMF said yesterday. With a debt burden that is still too high, Greece needs in-depth changes to its economy to both meet its fiscal targets and attract investors, according to the Washington-based lender.

The nation is taming the budget deficit even as it predicts the economy will shrink 4.5 percent this year, marking the sixth year of recession. The budget gap, which excludes outlays by state-controlled enterprises, narrowed to 1.4 billion euros in the first quarter from 7.3 billion euros in the same period a year earlier, preliminary figures released April 10 by the Athens-based Finance Ministry showed. The government target for the period was a deficit of 4.2 billion euros.

A gauge of Greek manufacturing rose to 45 for April from 42.1 in March, Markit Economics said on May 2, indicating the pace of contraction in the industry is slowing.

Greece’s government debt is rated junk by Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Funds that use bond indexes to determine their holdings of fixed-income assets may be unable to hold below investment grade bonds.

“As the picture improves, more and more investors could be lured in, provided that their investing guidelines allow it,” said Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London. “Also, as other spreads tighten, Greek debt would also be repriced lower. However, that doesn’t necessarily mean that trading volume picks up and investors will pile in.”

Reduced financial-market tension in Greece reflects a thawing of Europe’s debt crisis across bond and money markets, and diminishing speculation that the currency bloc could splinter.

Bonds of Europe’s so-called peripheral nations have soared since Mario Draghi’s July pledge to do “whatever it takes” to defend the euro, backed up in September by the announcement of a plan to buy short-dated securities of nations that request help.

Spanish and Italian bonds extended gains this month after the ECB policy makers cut the main refinancing rate to a record- low 0.5 percent on May 2 and signaled they may consider a negative deposit rate.

The yield on Spanish 10-year bonds fell below 4 percent on May 3 for the first time since October 2010, down from as much as 7.75 percent in July. Italy’s two-year rate dropped below 1 percent to a record low, after climbing above 8 percent in November 2011.

European bonds also are climbing after the Bank of Japan announced in April a plan to buy more than 7 trillion yen ($71 billion) of bonds a month to spur growth. The Frankfurt-based ECB has supplied more than 1 trillion euros of three-year loans to banks, while the Federal Reserve is buying $85 billion of Treasury and mortgage-related debt securities each month.

“The decision that Greece wasn’t going to leave the euro was the big play,” said Gabriel Sterne, an economist at Exotix Ltd., a London-based brokerage specializing in illiquid bonds and loans. “The Bank of Japan and the Fed have also driven everything lower and there’s not much higher-yielding stuff out there. I think Greek bonds are a bit overvalued now.”

Greek government bonds have returned 34 percent this year, Bank of America Merrill Lynch indexes show. Spanish debt earned 8.5 percent and Italian securities gained 5.1 percent.

Greece’s turmoil may not yet be over. The unemployment rate rose to a record 27 percent in January, leaving more than six in 10 young Greeks out of work, while the ratio of debt to gross domestic product will be 176 percent this year and 175 percent in 2014, up from 162 percent in 2012, the European Commission forecast on Feb. 22.

The IMF reminded European nations in its staff report on Greece that they committed “to provide additional relief, if needed, to keep debt on the programmed path” and “to bring it substantially below 110 percent of” GDP by 2022.

“There remain potential crisis points for Greece in terms of maintaining the polite fiction the country is on some road to recovery,” said Bill Blain, a strategist at Mint Partners Ltd. in London. “It’s a political game now.”

[Bloomberg]