Greece's Little-Traded Bonds Matter for European Credit Markets

  • Debt has a strong correlation with corporate credit spreads
  • Bank of Greece data shows trading is grinding to standstill

Varoufakis Calls Greek Debt 'Extend and Pretend'

The bonds hardly trade, and its buyers tend to be highly specialized, but Greece’s 10-year debt is more important than the size of the market would suggest.

The spread between Greek and German 10-year yields acts a proxy for risk appetite in credit markets, showing that a slump in the nation’s bond prices can spill over into other markets such as corporate debt. That spread, and the European credit curve, a measure of the difference in yields between high-yield and investment grade securities, have a correlation of 0.76 since January 2016, according to data compiled by Bloomberg.

Greece has returned to investors’ radars in 2017 as its talks with creditors to secure the release of further bailout funds hit another deadlock, causing its yields to spike higher. Such flare ups, in the nation where the euro region’s debt crisis began, take on a greater importance as they have the potential to spill over into other European markets, even if the bonds’ credit rating and predilection for sudden moves make them no-go areas for many investors.

Bank of Greece data shows that turnover on the electronic secondary securities market, or HDAT, totaled 26 million euros ($27 million) last month through Jan. 27, down from a peak of 136 billion euros in September 2004, while the annual volume of 519 million euros last year was the lowest since at least 2001. The difference between bid and offer yields on the 10-year bonds, another measure of market liquidity, is about 24 basis points, compared with 0.4 basis point for benchmark German debt.

As the latest debt talks remain deadlocked, the Greek-German 10-year spread has widened to 737 basis points, from about 640 basis points on Jan. 25. The move in the European corporate credit curve has been more limited in the period, widening just five basis points, with the correlation between the two series in 2017 falling to 0.24 as a result. A correlation of 1 would means the two spreads move in lockstep.

If the Greece debt polemic intensifies though, the historic strength of the relationship between the two measures suggests a more meaningful steepening of the credit curve may be imminent.

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