Greek yields drop, spread tightens after national election

Greek government bond prices outperformed their peers on Monday as investors welcomed the outcome of a national elections that they expect to lead to a contiuation of policies supporting economic growth and declining public debt.

Greece’s ruling New Democracy party (ND) took a commanding lead in Sunday’s ballot but fell just short of the threshold needed to form a government on its own. Prime Minister Kyriakos Mitsotakis was due on Monday to receive an official mandate to try to form a coalition.

But his party will likely push instead for a July runoff vote to achieve a one-party majority as a second election would leverage a new electoral system granting extra seats to larger parties, analysts said.

Yields on Greece’s 10-year government bonds fell 12 basis points (bps) to 4.009%, after hitting their lowest since January 20. Bond yields move inversely to prices.

The gap between Greek and German 10-year yields DE10GR10=RR was at 141.1 bps, its tightest since January 2022.

“In a change of view and despite already sharp Greek government bonds (GGB) spread tightening, we now expect GGBs spreads to tighten further in the near term and target 140bp for 10yr GGB-Bund spread,” said Aman Bansal, European rates strategist at Citi.

Given European financial support and the current low cost of debt, the government could significantly reduce Greece’s debt-to-gross domestic product ratio, which would be crucial for government bonds to regain investment grade status, analysts said.

Greece already achieved a primary fiscal balance in 2022, and the European Central Bank interest rate hiking cycle is impacting the Greek economy to a relatively minor extent.

Other euro area bonds struggled for direction after robust U.S. economic data and comments from ECB officials drove market bets on the central bank’s terminal interest rate slightly beyond 3.75%, as investors await the outcome of negotiations over the U.S. debt ceiling.

Germany’s 10-year government bond yield DE10YT=RR, the benchmark for the euro area, was down 0.5 bps at 2.419%.

U.S. House Republican Speaker Kevin McCarthy said there were positive discussions with President Joe Biden on solving the debt crisis. The Treasury Department has warned that the federal government could be unable to pay all its debts as of June 1.

Such an outcome would trigger a default that would cause chaos in financial markets.

The ECB must continue its fight to tame inflation “with determination” because wages are rising, fiscal policy is too generous, and inflation expectations remain too high, board member Isabel Schnabel said on Friday.

“This week, ECB talk looks set to turn more balanced, given that more than two more hikes will probably only be considered appropriate by the most hawkish-leaning council members,” said Hauke Siemben, rates strategist at Commerzbank.

The September 2023 ECB euro short-term rate (ESTR) forwards EUESTECBF=ICAP were at 3.67%, implying market expectations for an ECB deposit facility rate of 3.77%. The rate is currently at 3.25%. ESTR forwards price rate cuts by March 2024.
Source: Reuters (Reporting by Stefano Rebaudo; editing by John Stonestreet)