Greek Economy Optimism Seen in Yield-Curve Switch
Greece’s 10-year yield fell below the rate on its 30-year securities last week for the first time in almost three years, adding to signs the bond market in the nation that triggered the euro region’s debt crisis is healing.
The yield curve normalized on May 21 for the first time since June 2010, signaling investor optimism in the economy is increasing. The nation’s bonds are the best performers in the world this quarter, offering more than seven times the return of their next closest peer. Trading of Greek debt on electronic secondary securities markets is set this month to be the highest in at least two years and contracts linked to the nation’s growth are surging.
After carrying out the biggest sovereign-debt restructuring in history, Greek bonds have advanced on bets the country will remain in the 17-nation euro region. The rally got a boost this month when Fitch Ratings upgraded Greece’s credit rating.
The drop in yields is a sign the “markets have spoken,” Prime Minister Antonis Samaras said May 23, adding that Greece, which hasn’t sold bonds since March 2010, may follow Ireland in regaining access to capital markets while being part of a bailout program.
“Last year, Greek bonds were a play on whether they would exit the euro, but now it’s very different,” said Gabriel Sterne, a fixed-income economist at Exotix Ltd., a London-based brokerage specializing in illiquid bonds and loans. “Fundamental risks are still there, but the triggers for something disastrous happening are slightly less onerous.”
Exotix upgraded its view on Greek bonds to hold from sell last week, Sterne wrote in a May 22 note to clients.
“We’re nowhere near there yet, but if yields keep falling, at some point investment in financial assets could become investment in physical assets,” Sterne said today in e-mailed comments.
The 10-year yield dropped below the 30-year rate on May 21 after the spread widened to as much as 759 basis points on May 16, 2012, according to data compiled by Bloomberg based on closing prices. A so-called inversion of the yield curve is considered a sign that investors are more concerned about short-term crises than long-term solvency.
Greek 10-year bonds yielded 8.65 percent at 1:41 p.m. London time. The rate touched 8.10 percent on May 22, the lowest since June 10, 2010, down from a post-restructuring high of 30.97 percent on May 31, 2012. Thirty-year bonds yielded 8.35 percent, meaning the yield difference, or spread, between the securities was 29 basis points.
The rate on Greek 10-year debt compares with the 3.47 percent on Ireland’s 2023 bond, sold in March, and 5.58 percent for Portugal’s 2024 securities, sold through banks on May 7. Both nations plan to exit their bailout programs in the next year.
Greece sparked Europe’s sovereign-debt crisis in 2009 after saying its deficit was bigger than previously thought, reaching a record 15.8 percent of gross domestic product that year. The nation’s economy has contracted for 19 consecutive quarters as the government imposed austerity measures to trim the shortfall, while private bondholders agreed to write off more than 100 billion euros ($129 billion) as part of a restructuring of the nation’s debt in March 2012.
Greek government bonds returned 31 percent this quarter through yesterday, the best-performing securities among the 26 markets tracked by Bloomberg and the European Federation of Financial Analysts Societies. German bunds slipped 0.5 percent in the same period, while Italian bonds offered the second-best returns, adding 4.4 percent.
Greece’s 10-year yield fell 53 basis points on May 15, the day after Fitch upgraded the nation one level to B- from CCC. The ratings company said there is a “semblance of political and social stability” with the government showing more ownership over its adjustment program and a lower risk of exit from the euro area. Greece is still six levels below investment grade.
A gauge of Greek manufacturing rose to 45 for April from 42.1 in March, Markit Economics said on May 2, indicating the pace of contraction in the industry is slowing.
“The recent sovereign upgrade, slightly better economic data and continued commitment to fiscal reforms are supporting government bonds,” said Nick Stamenkovic, a strategist at RIA Capital Markets Ltd. in Edinburgh. “Ten-year yields should test 8.5 percent again in coming weeks, with a possible test of 8 percent.”
Analysts at New York-based Citigroup Inc. said May 22 that they no longer consider Greece leaving the euro in 2014 as a base-case scenario, although they said the nation has a fairly high risk of an exit in coming years.
Trading of Greek government debt through the electronic secondary securities market, or HDAT, totaled 133 million euros this month through May 15, set for the highest since at least June 2011, and compared with 69 million euros for all of April, data from the Bank of Greece (TELL) show. Trading slumped to zero in October 2011 from a peak of 136 billion euros in September 2004, the data show.
Securities issued in the country’s debt restructuring that have returns linked to the nation’s economic growth also are advancing. The so-called GDP warrants on bonds maturing in 2042 climbed to 104 cents on the euro. The securities are one of Exotix’s “Top-5 global picks,” analysts including Sterne wrote in a May 22 note.
The securities, which the Greek government can begin repaying in 2020, potentially begin to pay out next year if economic growth exceeds 2.35 percent and the gross domestic product is more than 210.1 billion euros. By 2021, the economy must be bigger than 266.5 billion euros with growth of 2 percent or more for the securities to pay out.
The Greek economy will contract 4.2 percent this year before growing 0.6 percent in 2014, according to forecasts from the European Commission. Unemployment climbed to a record 27 percent in February, the Athens-based Hellenic Statistical Authority said May 9.
“There are some signs of improvements, but the tasks ahead to regain market confidence are enormous,” said Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London. “The market hit 8 percent and then bounced back sharply. The yield drop was momentum driven and the market is very thin so it can move very fast one way or the other when it’s on a roll.”
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