Yield-Hungry Markets Set to Welcome Greece's New Seven-Year BondBy
Low Greek yields still beat returns from other European debt
A sale of Greek three and 10-year bonds likely before August
When Greece comes to the market in the coming days with a seven-year bond, it may find plenty of buyers -- not only because the country’s economy has stabilized but also because there isn’t a lot of better-yielding paper in Europe.
“The hunt for yield is still on as it is difficult to find appealing European bonds,” said Dimitris Dalipis, head of fixed income at Alpha Trust Mutual Fund Management SA in Athens.
As Greece heads toward the end of its third bailout program, after having successfully tested the markets in July with its first bond sale in three years and having implemented an unprecedented debt-swap in November, the government is keen to cement its relationship with foreign investors.
Euro-area finance ministers this month tentatively signed off on the latest set of economic reforms legislated by the Greek government, and agreed to disburse 6.7 billion euros ($8.2 billion) in aid starting February. For the country, the planned sale of a new seven-year note is aimed at shoring up cash reserves for the period following the termination of the current lifeline.
Greece wants a cash buffer of about 20 billion euros by the end of August in order to secure the repayment of debt and other obligations until the end of 2019. Half of this amount is expected to come from European Stability Mechanism during the bailout program and the rest should come from markets until summer. Investors, who’ve seen Greece yields slide, say the country’s debt still remains attractive.
“Yields have fallen significantly during the last months, but even now spreads are high,” said Giuseppe di Mino, managing director at Amber Capital in London. “We will consider participating in the new Greek bond sale when the time comes.” Amber Capital bought Greek bonds last year. It also owns 1 percent of Hellenic Telecommunications Organization.
The yield on Greek two-year bonds fell to a 20-year low of 1.25 percent this month; five-year debt trades at 2.89 percent while 10-year bonds yield 3.66 percent. In contrast, Spain pays 1.4 percent to borrow over 10 year, while France pays 0.96 percent.
Greece’s new seven-year bond, which is expected to raise at least 3 billion euros, will probably carry a yield about 3 percent, depending on demand, Alpha Trust’s Dalipis said.
There is positive momentum toward Greece at the moment, said Ioannis Sokos, a rates strategist at Nomura International Plc in London.
“We also see ongoing demand switch from hedge funds to more real-money accounts, although the very low credit rating is preventing many investors from buying Greek government bonds at the moment,” he said.
Moody’s has a Caa2 rating for Greek debt, eight notches below investment grade, while S&P rates it a B, also in deep junk territory.
Old Mutual’s Nicholas Wall still expects there will be strong demand for a Greek seven-year bond.
“I would expect a seven-year Greek government bond to come at around 3.25-3.30 percent,” he said.
The next step for the government is to issue a three-year note and a 10-year bond in order to fill the gaps in country’s bond curve and secure the cash buffer.
To prevent any possible disturbances in the markets because of the Italian elections from affecting its efforts, the government may sell the three-year bond before the vote on March 4. This means that the 10-year benchmark issuance will come later this year, probably before the end of the bailout program in August.
The bonds may get a good reception for investors with the improved relationship between the Greek government and creditor institutions, according to Wall. Greek Prime Minister Alexis Tsipras sees recovery and an exit from the bailout program as his best chance for re-election next year, while in Europe there’s a new found spirit of integration since the election of French President Emmanuel Macron.
“As long as that environment remains, investors will continue to like Greece in a market starved of decent opportunities,” he said.
— With assistance by Lyubov Pronina