Piraeus Bank: What does the global rise in interest rates mean for Greek bonds

The intensity of inflationary pressures at global and European level – regardless of their source – has rekindled the debate on the need to tighten monetary policy on the part of Central Banks. At Eurozone level, markets are already anticipating the completion of the quantitative easing program in the near future and an increase of at least 50 basis points in the ECB’s deposit rate.

As it is next, Piraeus Bank states in its analysis, the expectations for the exercise of restrictive monetary policy by the ECB have been passed over the entire interest rate yield curve of government and corporate bonds.

Characteristic of the fact, as it is pointed out, that the yield of the German 10-year bonds is now formed at the levels of 1% increased by 118 basis points from the beginning of the year. Inevitably, the yields on Greek government and corporate bonds have been dragged into this upward trajectory.

More specifically, the Greek government bond index of Piraeus Bank (see Chart 1), which summarizes the yields of all Greek government bonds traded in the international financial markets, has recorded a fall of 9.2% since the beginning of 2022 , which reflects an average increase in returns by 128 basis points, with the result that the current return of the index is now 2.15% from 0.88% at the beginning of the year.

The course of the corresponding index of Greek corporate bonds of Piraeus (see Chart 2) has recorded a decline of 5%, which translates into an increase in its yield to 3.69% from 2.63% at the beginning of the year.

The increase in yields – to the extent and to the extent that it will not prove to be temporary – raises reasonable questions regarding the increase in the cost of debt refinancing in the Greek economy. This question is not so pressing in terms of public debt as it is known that the largest percentage of Greek borrowing is long-term, has stable or offset and particularly favorable / preferential terms and the existence of a significant cash reserve should not be overlooked.

In contrast, corporate bond issues are much more limited in duration and the need to refinance them is much more visible in the near future. In both cases, however, rising yields increase the cost of borrowing to the extent that existing bonds, bank and transnational borrowing maturities as well as new investment / cash needs will have to be financed with new bond issues.

In the analysis, the bank approaches the increase or decrease in the cost of issuing new debt in relation to the cost of existing bonds based on the difference between the current average yield of the index (government or corporate) bonds and the current average coupon of the same index. The rationale here is that the current yield reflects the return required by investors at the current time to invest in a government or corporate bond.

Respectively, the coupon of each bond has a direct correlation with the return required by the investors at the time of its issuance. Therefore the difference between the two (yield vs. coupon) approaches exactly the increase or decrease of the borrowing cost from the moment the bond is issued until today.

In charts 3 & 4 the bank shows the difference between current yield and coupon in government and corporate bond ratios respectively. Regarding government bonds, Piraeus notes that the recent increase in yields has significantly reduced the benefit of refinancing old issues with new bonds to 66 basis points compared to a historically high level of benefit of 283 basis points recorded in December 2020. .