Greek bonds can maintain their momentum

Greek government bonds are continuing their impressive performance, and are at the top of many international firms’ investment lists. They have extended their strong rally that last week brought yields to new historic lows as that of the benchmark 10-year paper dropped to just 1.05 percentage points at Friday’s closing.

Greece has been lucky enough to enjoy an unusually positive international environment, where monetary easing is leading to low yields on eurozone bonds and a contraction of spreads, while concerns that emerge regarding the prospects of the economy are increasingly turning investors toward the safe haven of government bonds.

Of course Greece could not have capitalized on these positive conditions had it not recorded some significant progress on key fronts that investors monitor. The strengthening of growth prospects and investments, high levels of consumer confidence and economic sentiment, fiscal prudence, the systemic management of bad loans and the constant bond issues by Athens have formed a virtuous cycle that have increased the attractiveness of Greek debt.

However, one wonders how long Greece can maintain this momentum, and what will happen if the international environment ceases to be so favorable? Will Greek bonds remain on the investor radar?

“Provided Greece maintains a decent primary surplus and a decent rate of growth to maintain debt sustainability, the market will be more than happy to buy into Greek government bonds,” says Sebastien Galy, a senior strategist at Nordea Asset Management.

“The move to investment grade will crown a proud achievement but also provide access to a new pool of capital. [Greek government bonds] had already likely been entering into high-quality liquid assets of banks and the move to [investment grade] means that this will spread anchoring the 0-to-2-year firmly into negative territory. This then feeds into better fiscal dynamics, stronger banks and stronger growth,” he noted to Kathimerini.

Yet even if the favorable climate changes, Greece can retain its place in investors’ lists. Matt Cairns, an analyst at Rabobank, tells Kathimerini that, “clearly, Greece has been on the right path for some time in the minds of its lenders and so long as the country can continue to maintain a healthy balance sheet while working down its debt, rating agencies and lenders and of course investors will continue to shine a positive light in the country’s direction.”

“Greece no doubt benefits from the ongoing support of the European Central Bank’s programs, though indirectly so, as the asset purchase program provides a peripheral stabilizing backstop. For Greece to maintain its positive momentum is of course not entirely reliant on monetary easing and low yields – as yields rise (as and when this happens), investors will look for higher yields in stable economies that have manageable debt/gross domestic product ratios and successive governments that are focused on maintaining that very stance,” argues Cairns.

For Raffaella Tenconi, founder of Ada Economics and chief economist at Wood & Co, a serious deterioration in the international climate is unlikely: “As long as there is QE (quantitive easing) by the big central banks, then the pressure for lower yields is enormous. Greece will continue to benefit for at least two more years like everyone else,” she tells Kathimerini.

“Once the cash buffer disappears, as long as Greece has a decent issuance strategy, then I think it should continue to enjoy very favorable market conditions. Keep in mind that we are now beginning to see more clearly evidence that the potential growth rate of the country (that is the rate of growth that is achievable without creating imbalances under the current circumstances) is rising and maybe approaching 2 percent. That is a very high rate in the EU – together with low interest rates, it means that the sustainability of public debt has enormously improved and is among the better ones in the EU,” Tenconi points out.

For Ioannis Sokos, director of fixed income research at Deutsche Bank, there are two factors that determine sovereign spreads: credit risk and the market price of risk. 

“The first has to do with things such as the economic situation in each country. Solid growth, low unemployment, political stability, fiscal discipline, cash buffers, a strong banking system and lending growth are some of the variables that matter and help determine the credit risk or credit rating of a sovereign,” says Sokos. 

“Second, the market price of risk has to do with investor appetite, what we call risk-on or risk-off sentiment in markets. It is also affected by the monetary policy stance, which determines the level of yields as well as QE programs which tend to reduce risk premiums and push investors into riskier assets,” he explains.

“Greece and all other sovereigns with relatively high credit risk are benefiting from a very low market price of risk, in other words investors are not demanding high spreads in order to take the extra credit risk. This is mostly due to the very accommodative monetary policy stance at a global level, as well as from the negative yields in most ‘safe’ assets. These are variables not controlled by Greece, and most market participants expect this favorable monetary policy stance to continue for longer – i.e. markets are not pricing in rate hikes.

“Greece controls the former though – i.e. its own idiosyncratic credit risk. Bear in mind that if Greece regains its investment grade again, then it automatically means that it will become part of the biggest bond indices which are followed by most fixed-income investors. Therefore, it automatically generates a new pool of demand that is not there at the moment. Especially for Greece, I think the next challenge has to do with its banking system – i.e. further reductions in nonperforming loans. Cash buffers are also important, but gradually could be replaced by the market’s trust in Greece’s fiscal discipline and political stability,” concludes Sokos.