Greek-Italian yield spread moving closer to zero

Greek bond yields have started to rival Italy’s, with analysts estimating that the spread between them will soon drop to zero. This comes as Greece confirmed the return of market confidence on Wednesday, selling debt without interest.

The Public Debt Management Agency auctioned six-month treasury bills with a zero interest rate, against a rate of 0.1 percent in the previous auction. A few days ago it had also sold three-month T-bills with negative interest.

In sovereign bond terms, Greece has outperformed in the last couple of months, with yields dropping close to Italy’s for the first time in years. In September and October Greece’s 10-year benchmark bond yield has fallen 26 percent, from 1.6 percent to Wednesday’s all-time low of 1.18 percent, while the five-year yield has slumped 59 percent, from 1 percent to just 0.41 percent yesterday.

Meanwhile Italy’s 10-year bond yield has climbed from 0.8 percent to 1.1 percent, and its five-year note has almost doubled from the historic lows in early October.

“Greece is benefitting from the fact that it is still offering some yield pickup versus the second highest yielding country (i.e. Italy), while investors are already discounting that the Greek crisis is behind us and more upgrades will follow. At the same time, there is no one willing to take the opposite view, i.e. that Greek yields have rallied too much,” says Ioannis Sokos, Director at Deutsche Bank’s Fixed Income Research department.

All this means that on Wednesday the Greek-Italian spread stood at 87 basis points for the 10-year paper and at 41 bps for the five-year paper, with Europe Economist at Capital Economics Melanie Debono estimating the spread will vanish by the end of the year.

“We have recently changed our forecast for GGBs and now think GGB yields will probably end the year at around their current level. This means that we expect GGB yields to end the year at the same level of BTP yields by the end of the year,” Debono tells Kathimerini.
 
“What’s more, given Greece’s comparatively better growth prospects, relatively lower political risk and lower risks to public sector servicing costs, we suspect that GGB yields will trade through Italian BTPs next year. Indeed, we expect the Greek ten-year bond yield to fall to a record-low of 1 percent by the end of 2020, while we expect the Italian one to remain broadly unchanged at 1.25 percent next year,” she adds.

Credit rating upgrades are vital for Greece to see its bond yield continue its dive. Jens Peter Sorensen, Chief analyst at Danske Bank, tells Kathimerini that “there is definitely a possibility of Greece converging towards Italy – one of the key factors is the rating – S&P upgraded Greece last week and continue to have a positive outlook, while they left Italy’s rating unchanged. If this continues in 2020 and Greece gets an investment grade (it is only 3 notches from BBB-), and Italy is not upgraded – then Greece will converge as it will also be included in the PSPP.

“Furthermore, we probably have more and more investors that are buying Greece given the positive rating story as well as the new government which is perceived to be more pro-EU. There are some political risks still in Italy, which also make investors reluctant to may be going into Italy relative to the more positive story in Greece,” says Sorensen.