Yield curve shows investors still see short-term risk in Greece
The significant decline in Greek bond yields reflects the market’s confidence regarding the smooth completion of the bailout review and the prospect of the national debt restructuring. However, the bond yield curve remains negative for now as short-term bonds have higher yields and lower prices than their long-term counterparts. This means that the market continues to sees an increased risk in Greece in the short term.
Still, prices have covered much of the ground lost in the last year, with the spread of benchmark 10-year bonds – i.e. the yield difference compared to German bunds – dropping to 700 basis points, from over 1,000 bps at the start of the year. The returns on 10-year paper have reverted to 7.40 percent, from 19.2 percent in July 2015, and from 11.5 percent in mid-February, just three months ago.
Last week all yields of bonds expiring from 2023 to 2042 ranged between 7 and 7.4 percent, while the yield on paper maturing next year remained at 7.7 percent, and that expiring in 2019 at 7.4 percent.
The next crucial dates are Tuesday with the Eurogroup in Brussels, and then June 2, when the European Central Bank board meeting decides whether to include Greece in its quantitative easing (QE) program. It is obvious that the main investment tool for foreigners is bonds: When the ECB restores the eligibility of Greek bonds, in the context of its QE program, that will send bond prices higher.
The same occurred a few weeks ago with the bonds of Greek banks that were included in the ECB’s to-buy list, sending their prices soaring. If this trend continues, it won’t just benefit banks significantly, but Greek enterprises in general. This serves to explain the significant rise in prices and trading volume on the Athens stock market recently.
However, for more quality buyers to invest in the Greek bond market than the funds currently active in it, Greece will also require credit rating upgrades. At the moment Standard & Poor’s has Greece on B-, Moody’s on Caa3 and Fitch on CCC. Moody’s will review its rating on June 24, a day after the British referendum on EU membership, followed by S&P on July 22 and Fitch on September 2.
