The ‘miracle’ of Greek bonds

Investors’ perception of Greece has changed dramatically as is clearly seen from its performance in the bond market. Greece has managed to borrow more cheaply than several other eurozone countries, with Greek bonds no longer the riskiest securities and approaching the yields of countries considered to comprise the euro’s “core” – all despite the fastest ever monetary tightening by the European Central Bank.

Fund managers describe Greek bonds as a “small miracle” in the eurozone market, telling Kathimerini it is clear that “Greece is in… fashion” thanks to political stability, strong economic performance and the prospect of a return to investment grade after 13 years.

The spread of Greece’s 10-year bond against Germany’s has fallen to 122 basis points, the lowest since October 2021, with the rally having intensified since the May election.

Greek bonds have recorded the biggest improvement in the eurozone since last July, when the ECB started raising interest rates, with the drop in the spread exceeding 100 bps. The spread against Italy is steadily moving into negative territory, with Greek bonds trading at around 55 bps lower than the Italian ones, while the spread against Spain has fallen to multi-year lows, with the Greek 10-year yield at 3.63% on Friday.

Greece now borrows more cheaply than countries such as Cyprus, Malta, Croatia, Latvia, Slovakia, Slovenia and Lithuania – all investment-grade countries.

The explanation for the outperformance of Greek bonds is simple, state debt analysts note to Kathimerini. One reason is the fundamentals of the economy and its prospects and another is the small size of the Greek market and the fact that Greek notes are essentially “hard to find.”

“The spectacular outperformance of Greek bonds is the combination of a positive macroeconomic environment (including the election result and better fiscal prospects) and the lack of liquidity,” notes ING chief analyst Antoine Bouvet: “The free float of Greek bonds is a small part of the government’s debt and is a smaller market than most in the eurozone. This means that when the macroeconomic environment improves, the market is unable to meet the additional demand,” he explains.