Greek bond prices jump on PM's election victory

Discounts on Greek government bond yields widened to their highest level compared to Italy since at least 1999 after the prime minister won an election victory, underscoring growing investor perceptions that Athens is now worth more than Rome. is less risky.

The yield on 10-year benchmark Greek debt fell more than 0.15 percent to 3.85 percent on Monday as markets reacted positively to a result that left Kyriakos Mitsotakis’ party just four seats short of the 150 needed for a parliamentary majority. A new vote is scheduled for next month. Yields fall when prices rise.

The move means the gap – or spread – on Italian bond yields over Greek bond yields is now at its widest since at least 1999, according to Bloomberg data. Italian debt yields 4.3 percent.

Greece and Italy are seen as the two riskier debt markets in the EU, but yields on Greek debt have traditionally been the higher of the two, reflecting market concerns about the country’s debt burden. . Its yields skyrocketed during the Greek debt crisis in 2011 and 2012.

At times the spread has briefly turned negative – meaning Greece’s borrowing costs were lower than Italy’s – notably in late 2019.

Most recently, spreads turned negative again in April of this year and are widening as Greece moves closer to restoring its investment grade status.

“The market has corrected itself for the time being,” said Holger Schmitting, chief economist at German investment bank Berenberg.

“Italy is doing remarkably well under Giorgia Meloni. But under Kyriakos Mitsotakis, Greece has become the star performer among the more important eurozone countries,” he said.

Greece and Italy have both been among the best performing bond markets in the bloc this year. The ICE Bank of America Index of Italian bonds has shown a total return of 2.7 percent year to date, while its Greek counterpart has gained 4.2 percent. This compares with a return of 1.2 percent for the Eurozone.

The fall in Greek 10-year bond yields on Monday narrowed its spread with German bonds – a popular risk measure – by 136 basis points, the lowest level since November 2021.

Analysts say the jump in Greek bond prices was likely due to ‘fast money’ investors buying the bonds to outpace any upgrade to investment grade status, which would open up Greek bonds to a wider pool of investors.

Richard McGuire, head of rates strategy at Rabobank, said hedge funds closing short positions, which increased during the election, may also have boosted the Greek bond market on Monday.

According to Sean Kou, rates strategist at Societe Generale, “an (investment grade) upgrade (for Greece) is priced in now”.

After rising to 206 percent during the pandemic, Greek government debt as a proportion of GDP fell to 171 percent last year, the lowest level since 2012 and one of the fastest rates of debt reduction in the world. was one of the

It is expected to continue declining in 2023, aided by high inflation, resilient growth and a primary budget surplus. Italy’s debt to GDP ended last year at 144.4 percent, down from 150 percent a year earlier.

Berenberg’s Schmieding said Greece’s debt-to-GDP ratio “is set to fall below Italy’s by 2026”. As well as strong growth, Greece also benefits from the fact that much of its debt is still owned by the EU institutions that bailed it out a decade ago and is therefore “more vulnerable to rate hikes than other economies”. less exposed”.

Stephen Dyck, a senior vice president at Moody’s, said the weekend’s election result was “credit-positive” for Greece as it would “suggest continuity in fiscal and economic policies” and improve “prospects for further significant reductions”. debt burden on the country