Greek bonds, like bonds in the region as a whole, have so far been holding up ECB rate hikes well, making them increasingly attractive to investors, while new issues are in high demand.

Contrary to what was originally expected, their returns, which are a measure of investors’ risk perception, have fallen since the ECB began raising interest rates in July 2022, with Greek spreads showing the biggest decline. And all this without the support of the ECB, since it did not implement the flexible PEPP reinvestment program with special … zeal. At some intervals, for two months from December to January, he even continued to reduce his positions in Greek bonds (now they are 37.76 billion euros from 40 billion reached when the PEPP ended in March 2022).

Italian bond spread is trading at 190 basis points, down about 45 bps. since July, the Spanish spread has narrowed by about 20 basis points. on 106, the Portuguese on 28 m. by 89, while the Greek spread narrowed by about 80 bp. at 178 basis points. The 10-year Greek bond yield is approaching 4.2%, up from 5.1% last year, and is now dropping lower than 10-year Italian bonds, while the distance to Spain has also narrowed significantly, only up to 80%. m.p.

Greek spreads show the biggest narrowing in the euro area since July, when the ECB started raising interest rates.

As Antoine Bouvet, a bond market analyst at ING, points out in K, risk appetite has improved since the beginning of the year, citing better economic prospects and central banks appearing to be getting inflation under control. This has benefited regional bond markets such as Greece for two reasons. a) riskier assets performed well as a recession was avoided in most of Europe, and b) yields fell as Fed/ECB rate hike expectations declined.

At the same time, the fact that the current high inflationary conditions have reduced the level of government debt in the region, especially in Greece, has strengthened investor confidence in the region. As Dennis Sen, director of Scope Ratings, notes in K, “Greece’s debt ratio is gradually approaching the level of the rest of the region, and we estimate that by 2027 it will reach 150.5% of GDP. This is comparable to our projections for the debt ratio of Italy (142.1%) and Spain (107.2%) for 2027.”

The prospect of Greece returning to investment grade by at least one rating agency this year is already priced in, but analysts see value in holding Greek bonds with the expectation that they will be included in major bond indices in the future that “require” investment grade at least two houses. In particular, according to Citigroup analyst Aman Bansal, Greece will need two investment-grade ratings to join the Bloomberg Barclays index, and to be included in the iBoxx it will need three investment-grade ratings, as well as at least one “A” rating.

Société Générale is already placing Greek bonds among its top ‘bets’ for 2023, believing S&P will be the first agency to give Greece an investment rating, likely in October, and expects a Portuguese-like rally when it also occurs in September 2023 . 2017 received the first investment grade rating. In addition, the French bank estimates that spreads in the euro area as a whole are now less likely to widen, and in this environment it prefers smaller bond markets. As Adam Kurpil, head of bond strategy at Société Générale, noted in an interview with K, “we recommend 10-year Greek bonds, not Italian ones, since Greece is one step away from investment grade, while, unlike Italy, it will be unaffected by the ECB’s quantitative tightening (QT). At the same time, we estimate that the significant improvement in Greece’s fiscal performance will continue in 2023, and this will support the growth of its bonds this year.”