UPSIDE RISKS TAKE THE LEAD DESPITE RISING ECB RATE
At the start of 2023, government and corporate bond markets were bullish as investment sentiment improved due to slowing inflation and expectations of better-than-expected economic activity. However, these expectations are accompanied by significant uncertainty, making the upward momentum in Greek bonds fragile. Specifically, in January, the Piraeus Bank Government Bond Index recorded gains of 1.2%; however, these gains weakened in the second half of the month. From 568 points at the beginning of the month, the index reached a high of 586 points on 19 January 2023 and decreased to 572 points by the end of the month. At the beginning of February, no significant movement has been recorded, as the index is maintaining similar levels. In 2022, the index decreased by 17%, a significant drop compared to previous years. However, given the inflationary pressures and the implementation of interest rate hikes by the major central banks in the same year, a decline in the Greek bond market was expected and, in fact, matched that of the Eurozone’s government bonds, with the corresponding Eurozone government bond index registering a drop of 18.2%.
Regarding individual bonds, the biggest losses in 2022 were recorded for government bonds maturing after 2030, whose losses exceeded 20% in several cases. However, in January, the majority of bonds recorded a fall in yield to maturity in the range of 30–50 basis points (bps). According to the estimated interest rate curve, given the downward shift of the curve in January, the largest decline in rates (i.e. surpassing 45 bps) occurred in the medium-term segment of the curve and, in particular, in the 3–7 year maturity range.
Two important developments were the main drivers of the upward movement in government bonds amid the continuation of the key rate hike cycle by the ECB. The first was the successful issuance of the new 10-year bond by the Public Debt Management Agency (PDMA) on 17 January, as the €3.5 billion of the issue was oversubscribed by 6.2 times with the participation of approximately 230 accounts. The coupon of the issue was set at 4.25%, which is 250 bps higher than the corresponding 10-year bond issued in January 2022; however, it is worth noting that this issue covers 50% of the €7 billion bond issuance programme for 2023 announced by PDMA. Second, Fitch upgraded Greece’s credit rating by one notch at the end of January, from BB and a positive outlook to BB+ with a stable outlook. Currently, five rating agencies (S&P, Fitch, DBRS, R&I and Scope) rate Greek government bonds one notch below investment grade with increasing expectations for a further upgrade in the second half of the year. Markets now focus on Moody’s credit rating decision on 17 March 2022 , as the current Ba3 rating (stable outlook) is two notches below that of the rest of the rating agencies.
At the end of January, the 10-year Greek spread reached almost the same levels as the corresponding Italian spread at 202 bps, continuing the positive path of the Greek economy’s credit risk. However, the quantitative valuation model based on macroeconomic data and the leading indicators of the Greek and German economies shows that current levels overstate the relative fundamentals of the Greek economy, even after taking into account the ECB’s support for bond repurchases through the PEPP programme. Specifically, the valuation of the 10-year spread consistent with fundamental data is between 230 and 240 bps, which is about 43–53 bps from current levels (9 February 2023). However, positive dynamics are reflected in the Balance of Risks Index, which shows an increase in the probability of further short-term tightening in the 10-year spread compared to the probability of a widening spread.
Despite the above positive developments for Greek government bonds, the uncertainty as the economy enters an election period, the risk of fiscal imbalances and the fragile economic environment in the Eurozone continue to pose significant risks.
Following a similar path to that of government bonds, the Piraeus Bank Corporate Bond Index recorded monthly gains of 0.93% in January, reaching 137.4 points at the end of the month. In January, the weighted median yield to maturity of the index recorded a marginal drop of 8 bps compared to the previous month, falling to 4.65%. Over 2022, the index’s weighted median yield strengthened by 210 bps from 2.63%, with losses in 2022 reaching 7.5%, which was a historical low in the last eight years. Specifically, the biggest losses for the previous year were recorded for Frigoglass’s bond, which recorded losses of 70%, and the Coca-Cola and Noval Properties bonds, which recorded losses of 22.4% and 16.5%, respectively. For January, the majority of bonds in the index posted gains ranging from 0.16% for Mytilineos’s bond, maturing in 2024, and 3.75% for Lamda Development’s bond, maturing in 2029.