The discount on Greek government bond yields to Italian bond yields widened to the highest since at least 1999 after Greece’s prime minister won the election, underscoring investors’ growing view that Athens is now less risky than Rome.
Benchmark 10-year Greek government bond yields fell more than 0.15 percentage point to 3.85% on Monday, with markets reacting positively to the result, which puts Kyriakos Mitsotakis’ party within a mile of a parliamentary majority That’s just four seats short of the required 150 seats. A new vote will be held next month. Output falls as price rises.
The move means the spread, or spread, between Italian bond yields and Greek bond yields is now at its widest since at least 1999, according to Bloomberg data. Italian government bonds yielded 4.3%.
Greece and Italy are seen as the two riskier debt markets in the EU, but Greek debt has historically yielded the higher of the two, reflecting market concerns about the country’s debt burden. Its yields soared during the Greek debt crisis of 2011 and 2012.
The spread briefly turned negative several times – meaning Greece borrowed less expensively than Italy – most notably in late 2019.
Most recently, spreads turned negative again in April this year and have widened as Greece nears regaining its investment grade status.
“This time around, the market got it right,” said Holger Schmieding, chief economist at German investment bank Berenberg.
“Italy has done very well under Giorgia Meloni. But under Kyriakos Mitsotakis, Greece has become a star among the more important eurozone countries,” he said.
Both Greece and Italy have been among the best-performing bond markets in the euro zone this year. ICE Bank of America’s Italian bond index has posted a total return of 2.7% so far this year, while its Greek bonds have gained 4.2%. That compares with a return of 1.2 percent in the euro zone.
Greek 10-year bond yields fell on Monday, with the spread over German bunds, a popular risk gauge, narrowing to 136 basis points, the weakest since November 2021.
Analysts said the surge in Greek bond prices may be due to “fast money” investors buying bonds to pre-empt upgrades to investment-grade status, which would open up Greek bonds to a wider range of investors.
Richard McGuire, head of rates strategy at Rabobank, said a surge in hedge funds unwinding short positions in the run-up to the election may also have boosted the Greek bond market on Monday.
“(Greece’s) (investment grade) upgrades are now priced in,” said Sean Kou, rates strategist at Société Générale.
Greece’s government debt fell to 171% of GDP last year, its lowest level since 2012 and one of the fastest debt reductions in the world, after surging to 206% during the pandemic.
The decline is expected to continue in 2023, helped by high inflation, resilient growth and a primary budget surplus. Italy’s debt-to-GDP ratio was 144.4% last year, down from just under 150% a year earlier.
Greece’s debt-to-GDP ratio “looks set to be lower than Italy’s by 2026,” Berenberg’s Schmieding said. In addition to strong growth, Greece benefits from the fact that most of its debt is still owned by the same EU institutions that bailed it out a decade ago, so it is “less vulnerable than other economies to rate hikes”.
Steffen Dyck, a Moody’s senior vice president, said the weekend’s election result was “credit positive” for Greece as it “would indicate fiscal and economic policy continuity” and improved “further substantial Prospects for Debt Reduction” The country’s debt burden.