Greek Bond Yields Drop Toward 2015 Low on Election Optimism

  • Nation's credit rating is up for review by Standard & Poor's
  • Greek government bonds have returned 16 percent this year

Greece’s government bond yields have fallen back to levels last seen before the nation’s January elections that swept the anti-austerity Syriza party to power.

In the intervening time, yields had surged as the new government sought to renegotiate its debt deal and secure more bailout funds. Those talks pushed the nation to the brink of exiting the euro, and capital controls were imposed. After an accord to disburse more aid, signs of stress in the bond market eased. Benchmark 10-year securities gained for a third week as euro-area finance ministers are set to meet in Luxembourg, where the state of play will be discussed. 

While the situation has improved, it’s not resolved. Greece still has an inverted yield curve-- whereby longer-maturity bonds yield less than those on shorter-dated debt -- showing that investors keep pricing in some probability of default. Greece faces snap elections on Sept. 20. A poll published Friday showed Syriza party, led by Alexis Tsipras, widened its lead over rivals. The nation’s credit rating was affirmed on Friday by Standard & Poor’s Friday.

“The election outcome is still unclear, but it seems like there’ll need to be some sort of coalition,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “Whatever form that takes it’ll be broadly MOU-supportive, so it’s a positive for the market,” he said referring to the Memorandum of Understanding, the accord struck with creditors. There “seems to be the growing feeling that the whole capital controls episode was less damaging to the Greek economy than initially feared, so that’s definitely a positive development,” he said.

Greece's Yield Curve Today vs Three Months Ago
Greece's Yield Curve Today vs Three Months Ago
Source: Bloomberg

The yield on Greece’s 3.375 percent note due in July 2017 rose almost one percentage point to 11.68 percent on Friday at the 5 p.m. London close. The yield had fallen to 9.71 percent on Thursday, below its 10.08 percent close on Jan. 23, before the Jan. 25 elections. The price of the security on Friday was at 86.92 percent of face value.

Benchmark 10-year yields were at 8.64 percent, from as low as 8.39 percent on Thursday, also the least since January.

Some members of the Syriza party who opposed the bailout deal have splintered into another party, called Popular Unity. Meanwhile the leader of opposition New Democracy party, Evangelos Meimarakis, said he would form a coalition with Tsipras to safeguard Greece’s place in the euro area.

The hurdle over Greece’s debt sustainability remains. Discussions about debt relief for Greece won’t be part of the first review of the current aid deal, according to a European Union official. European Central Bank Executive Board member Benoit Coeure said that there is margin for adjustment in Greece’s reform program after the elections have passed. 

“The important thing is that Greece and its partners trust each other again,” he said in an interview published on the central bank’s website Friday. “On this basis, there will be room for maneuver when it comes to adapting the program after the elections, for example in terms of labor-market reforms and tackling vested interests, provided that the objectives of the program are met.”

Better Return

Greek government bonds returned 16 percent this year through Thursday, according to the Bloomberg Greece Sovereign Bond Index. That compares to the average euro-area return of 0.5 percent. Greece’s returns were positive in August and July, following two months of losses. In June, the losses were the steepest since May 2012.

Despite the brightening outlook in the bond market, trading Greece’s debt is still difficult, and volume is scant. Data from the Bank of Greece showed the volume across all maturities totaled 1 million euros ($1.1 million) last month on the central bank’s electronic secondary securities market, or HDAT. Volumes plunged to zero in June for the first time since October 2011 after peaking at 136 billion euros in September 2004. 

Greece’s regulator suspended government-bond trading for part of June and July, though deals were possible on other platforms. With trading volumes this low, investors are unable to buy or sell the securities without buffeting prices.

“The way the bond market treats political risk is really quite simple: uncertainty is bad as it increases the risk premium,” said Peter Chatwell, a rates strategist at Mizuho International Plc in London. “Tsipras has reduced some uncertainty by dividing his party, rendering Syriza more stable.”

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