Greek government bonds are back in the spotlight, outshining their peers and returning 26% since mid-March, when the European Central Bank announced it would buy Greek debt for the first time ever – a seal of approval for conservative investors.
After being bailed out three times in the last decade, ECB purchases are the icing on the cake for Greek debt, which, boosted by economic recovery, had already been popular with yield-hungry investors prior to the pandemic.
The ECB had already bought at least 6% of the Greek bond market, holding 4.7 billion euros ($5.3 billion) at the end of May as part of its Pandemic Emergency Purchase Program.
Ten-year borrowing costs fell to February lows this week at just above 1%, a fraction of the levels over 4% they spiked to at the height of the coronavirus-led March sell-off. Borrowing costs are down so much that Greek bonds yielded up to 60 basis points lower than Italian equivalents recently despite their junk ratings and a very illiquid market, just 3% the size of Italy’s, the eurozone’s largest.
“Once you’ve included Greece in QE (quantitative easing), it becomes a normal eurozone country, where the monetary policy doesn’t discriminate against it,” Michael Michaelides, analyst at Carmignac, a long-term holder of Greek bonds, said. “Before, you almost needed to have a special credit approval if you were a very, very safe real money investor or you needed to have your credit team go to Greece and assess these fundamental things.”
Greek debt is poised for more gains as the ECB could buy at least another 18 billion euros, a Finance Ministry official said, while only 2 billion euros more of issuance is expected this year.
“There should be sufficient leeway for the ECB to crowd out the private demand,” said Commerzbank rates strategist Rainer Guntermann. He sees potential for 10-year yields to hit record lows below 1%.
And the ECB is not the only game in town – Greece could be the biggest beneficiary of the European Union’s 750-billion-euro recovery fund investors hope the bloc’s 27 members will approve next week. An allocation key published with the proposal estimates Greece could receive a net benefit of 22% of GDP.
Still, some investors are sounding a note of caution, citing illiquidity. Mark Dowding, chief investment officer at Bluebay Asset Management, recently sold off his entire Greek bond holdings of 2 billion euros – around 3% of the outstanding market.
After pocketing ECB-led gains, he jumped into Italian debt as the pandemic dashed hopes of a near-term rating upgrade to investment-grade for Greece. [Reuters]