Greek bond rally looks set to continue

Greek bond rally looks set to continue

Greek government bonds have doubtlessly been a key focus for investors in 2019, with their returns being impressive as well as surprising for most. Greece’s return to the markets, raising 9 billion euros in total and attracting ever more quality investors, combined with the country’s improved economic prospects, the strengthening of confidence and credibility after the elections and the existence of the large 32-billion-euro cash buffer, has served to make Greek state debt especially appealing, sending the country’s cost of borrowing down by 70 percent.

Although it looks as though it will be difficult to repeat this kind of result in 2020, given the great rally already observed, as well as the slowdown expected in the global economy, analysts appear particularly optimistic: They tell Kathimerini that Greek bonds have the capacity to become one of the top trades in the world next year too.

They argue that Greece is no longer seen as a country of the European periphery: “As an outfit we are keen on Greece from the fixed income, credit and equity point of view as one of the bright spots in Europe for 2020,” Sebastien Galy, senior macro strategist at Nordea Asset Management, told Kathimerini.

“Falling interest rates and a return of confidence should mean that the economy outperforms not only as a short-term boost but as also in the longer term. Whatever reforms need to happen, they will be much more easily achieved during a time of growth and we expect Greece to cruise along as Spain has been after emerging from its crisis,” he noted.

“More importantly, Greek sovereign debt will become increasingly available for front-end risk management positions of banks as it acts as a safe haven in times of crisis. The real story though is in credit risk and to a lesser extent equity as more and more foreign investors return to Greece. It has been a long and difficult road but Greece is finally emerging from the periphery. Some call it semi-core, it is just not as safe as Germany and hence quite attractive,” added Galy.

Melanie Debono, Europe economist at Capital Economics, expects the Greek 10-year bond yield to range around 1 percent in 2020: “The recent rally in Greek bonds seems to reflect greater appetite for bonds over equities, perhaps as a result of recent geopolitical tensions with Turkey. Looking ahead, the immediate outlook for Greece is fairly bright. Recent tax cuts will help support domestic demand. And the government should have no problem servicing its debt in the coming years given the exceptionally generous debt service profile. We think the positive economic outlook will support Greek bonds, pushing them down from 1.4 percent today to 1.0 percent by end-2020. We also expect Italian bond yields to fall, but only to 1.25 percent (from today’s 1.40 percent). As a result, we forecast that Greek bond yields will be below those of Italy by the end of 2020,” she explained to Kathimerini.

Furthermore, analysts do not rule out Greece being raised to investment grade by at least one rating agency, obtaining new fuel for another Greek bond rally. Jens Peter Sorensen, a chief analyst at Danske Bank, noted to Kathimerini that “we still have a very constructive stance on Greece going into 2020 given the fundamental outlook and the expected upgrade into investment grade territory. Greece has performed significantly in 2019, and the widening we have seen recently is similar to the other peripheral countries. We have seen this kind of widening in previous years as well and it is more to do with low liquidity up until year-end and investors are waiting for the new syndicated deals in January. Hence, we expect that the spreads will begin to tighten at the start of 2020 as well as more convergence with Italy,” said Sorensen.

French bank Societe Generale is now back as a Greek bond purchaser. Despite the rally recorded in 2019, “there is still scope for an improved appreciation of Greece’s credit profile to support Greek government bonds,” Ciaran O’Hagan, head of Euro Rates Research at Societe Generale, said in a report.

“The performance of Greek bonds in 2019 has been due more to global sentiment than domestic developments in Greece. Improving credit fundamentals in the country and the change in government arguably have barely impacted the spreads of the Greek and Italian bonds,” he wrote.

He noted that Greece’s Public Debt Management Agency remains set on a policy where it follows in the footsteps of Portugal and Cyprus: “These issuers got themselves into a virtuous cycle, where investor demand spurred rating upgrades, making it in turn easier for investors to buy Greek government bonds,” the Societe Generale analyst pointed out.

The 32 billion euros set aside by Athens has served to ease its way back to the markets, and this will remain a strong attraction for investors who see that there is no rush for bond issues by the government. The situation should lead to a rating upgrade, the French lender estimates.

“Greece has been endowed with a large cash buffer that should allow it to sail through the next three years with no real pressure to issue at all. That also means that there is very little credit risk for investors in Greece for the next three years. This remains largely underpriced, despite the rally in 2019. We thus expect more rating upgrades on the heels of the massive fall in yields. Rating agencies do not admit it, but they often end up tracking bond spreads over time,” O’Hagan wrote in the Societe Generale report.

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