Foreign investors are increasingly demonstrating their confidence in Greek debt, with Greek bond yields dropping below those of Italy on Wednesday, while strong demand for a 26-week treasury bill issue saw its interest rate tumble.
The positive climate is to a great extent thanks to the moves of the European Central Bank, analysts tell Kathimerini, and to the advantage of the Greek assets, paving the way for another bond market foray in the coming weeks.
The yield of the benchmark 10-year paper slipped on Wednesday to 1.47 percentage points, as the spread against the German bund fell to 188 basis points and that against the Italian 10-year bond turned negative by 9 bps. Pressure on Italian yields is due to Rome’s new issue of a new 10-year note with record bids of over 100 billion euros.
Such is the positive climate for Greek debt that Wednesday’s T-bill issue was oversubscribed 2.31 times. Greece raised €1.6 billion at an interest rate of 0.25%, against 0.36% at a similar auction in April.
Explaining the negative spread of Greek bond yields against their Italian counterparts, Sebastien Galy, Nordea Asset Management’s senior macro strategist, said, “The difference between Greece and Italy is the perception that Greek growth can rebound quite nicely while Italy may trend at 1% or a tad below without reform.”
“The second element is that we have the ECB decision on Thursday with consensus expecting €500 billion in QE while we expect €600 billion. That forces a search for yield that was more appealing in Greece. Finally, there are concerns about the ability of any government to push through needed reforms in the next few quarters in Italy and the next Covid-19 package may have some constitutionality to please hawks. There again Italy may be at a disadvantage,” Galy says.
According to Ioannis Sokos, fixed income research director at Deutsche Bank, “first of all we have a broader reversal of the Covid impact on the bond market. The ECB is the main reason behind that, along with the European Commission proposal on the Recovery Fund structure. Greece specifically, through Covid-19, found its way into the ECB’s QE program, specifically the pandemic emergency purchase program (PEPP), and Tuesday’s data showed that the ECB has bought €4.7 billion of Greek debt since its launch. That’s massive, given the total size of the Greek bond market.”
“The market at this stage seems to care less about the economic impact of the Covid-19 crisis in each country, with Greece one of the countries that is expected to be hit the hardest in terms of growth shock and deficit, and instead it’s the ECB purchases that matter the most for markets. Therefore, the ECB along with any progress on the EU recovery fund should continue being the main drivers of the risk-on sentiment in European government bond markets,” he says.