Bond sales wave will not last for long

Last week’s sudden wave of Greek government bond liquidation has made quite an impression on traders and experts in the market. It began just 24 hours after the yields on Greek securities dropped below those of Italian bonds for the first time since January 2008.

The yield of the 10-year benchmark bond exceeded 1.55 percentage points on Friday, before settling at 1.47 percentage points at the end of the trading week, whereas just a few days earlier it had registered an all-time low of 1.155 percentage points. That means that the cost of borrowing soared 34 percent for the Greek state in a very short period of time.

Analysts tell Kathimerini that the reaction of numerous investors to that milestone achieved by Greek bonds in relation to Italian debt was quite logical, especially since the international bond market has been experiencing a strong sell-off for more than two months, with the value of foreign bonds with negative yields dropping by some $6 trillion, from a peak of $17 trillion in late August to just $11 trillion a few days ago.

The pressures on bonds, especially eurozone debt, are related to changes in expectations, regarding both the policy of the European Central Bank and the containment of concerns that a few months ago had led to investors resorting to state debt: In the last few weeks, fears of a trade war between the US and China and about a British exit from the European Union without a prior agreement between them have been significantly reduced, thereby containing concerns about a recession in the global economy.

However, the most important factor for the change in the mood on bond markets has been the sinking of expectations that the ECB would proceed with measures to further ease its monetary policy; it appears that the eurozone’s central bank is running out of weaponry to support growth, and it will be up to governments and fiscal policies to pick up where the ECB left off.

This shift in the international climate combined with the decision by two global firms (UBS and Societe Generale) to issue sell recommendations on Greek securities have certainly increased the inclination toward liquidation in the Greek market, with many investors apparently considering the fact that Greece could borrow at a much cheaper rate than Italy excessive. Furthermore, the low liquidity and the small size of the Greek market makes the country’s bonds vulnerable to international developments and susceptible to strong ups and downs.

Even so, analysts appear optimistic that Greek bonds will soon start outperforming again. Sebastien Galy, a senior macro analyst at Nordea Asset Management, tells Kathimerini that Greek bonds are likely coming under pressure because stress tests by asset managers, hedge funds and banks are exploiting the historically negative relationship between Greek bonds’ yields and risk.

“We do not expect this to continue past [this] week as risk stabilized. What we then expect is that the search for yields will continue again and Greek bonds yields will then be compressed lower. Much of our trading is done systematically and hence relies on the past, but once an opportunity is present, macroeconomic traders can then take advantage of it,” says Galy.

Jens Peter Sorensen, chief bond market analyst at Danske Bank, tells Kathimerini that there is a “very simple explanation” for the recent Greek bond sales: “We are getting close to year-end as most investors have begun to close positions and do not take new positions – hence the spreads typically widen” toward the end of the fourth quarter. “We have seen the same in Italy, in Spain and in Portugal as well. But when we get into January, then spreads begin to tighten again. So this widening is only expected to be a short-term phenomenon and demand will pick up in January,” he argues.

Bank of America appears even more optimistic about the course of Greek bonds in the future, and this is related to the government policies that are promoting reforms and assisting the recovery of the country’s credit sector. It argues that the performance of Greek government bonds “has been extraordinary this year” and we may well have not yet seen the end of it.

“We see scope for the momentum to extend in the front end of the Greek bond curve, supported by three factors: The first is the continued search for yield, with Greek government bonds benefiting from increased liquidity in that context; the second is that the reform momentum [in Greece] is picking up, and along with its acknowledgement from rating agencies, and the third is the increased chances that Greece recovers a buyer of last resort, namely its banking sector,” according to the statement by the Bank of America.

The prospects of Greek banks are also generating optimism, according to Euroxx Securities. The Greek company says in a report that the targets set for the reduction of nonperforming loans may be difficult but they are attainable, and discerns a growth margin for their stock prices of between 18 and 35 percent. Euroxx also anticipates further issues of Tier II securities by Greek banks aimed at strengthening their capital positions and has upgraded its estimates on the lenders’ profits for 2019 by 17 percent, mainly thanks to the banks’ profits from Greek bonds.