Piraeus Bank: Yields on yields against the backdrop of inflationary surprises

With inflationary surprises continuing, the bond market reached significantly lower levels at the end of January, with the downward trend showing no signs of reversal, at least in the short term. Specifically, in January, the Government Bond Index reached an 18-month low of 665 points (31/01/2021). The index, which rose in November, reversed the following month, while its decline accelerated after the ECB meeting on 16 December. In January, the index continued its downward trend, recording losses of 2.72%. On an annual basis, the Index recorded losses in 2021 by 2.13%, reversing for the first time the positive returns of previous years. However, given the significant upward trend in Greek bond prices in recent years as well as the uncertainty from inflationary pressures in the Eurozone bond markets in the same year, the slowdown in the Greek bond market was expected.

In this context, the interest rate curve shifted upwards in January with the largest interest rate increases recorded in the medium and long term part of the curve. Specifically, an increase of more than 30 basis points (bp) recorded the interest rates for maturities over 5 years while the interest rates with maturities over 8 years exceeded the levels of December by 40-45 bp. In this environment of uncertainty, ODDIH proceeded with the first bond issue for 2022 with the 10-year bond worth € 3 billion, marking an overpayment by 5 times with a significantly higher yield. Specifically, the demand for the bond was lower than the issue of the 10-year bond in June last year, while its yield was found to be 100 bp higher at 1.84%, signaling the new data in the international bond markets. The exit to the markets was the first for this year and comes a few days after Fitch upgraded the outlook of the economy from “stable” to “positive”, keeping our country on the BB scale, ie lower than the level of investment grade. Yields on the Greek 10-year bond recorded a significant increase in the first week of February with the yield recording losses of over 64 bp reaching 2.52% (on 7/2/2022), the highest level since April 2020, reflecting a wider rise in eurozone bond yields.

Perhaps more worrying is the increase in the 10-year spread compared to the performance of the German 10-year as it strengthened by 37 bp in January to 188 bp after a decrease of 10 bp in December. In addition, in the first week of February, the 10-year spread strengthened to 231 bp, reaching the levels of May 2020, ie the period of the introduction of Greek bonds in the PEPP program of the European Central Bank (ECB). With the markets having started pricing the termination of the PEPP program even with the flexible terms for Greece announced in December last year, the valuations according to the quantitative model remain low compared to the current level. Specifically with the data of January, a “fair” price for the spread is at 142 bp, supported mainly by the high rates of economic activity but also the relatively low level of volatility in the international bond markets. However, according to the Risk Balance Index, the probability of higher spreads in the future (negative scenario for Greek bonds) has gradually increased since November 2021 compared to the probability of lower spreads.

In contrast to the profits of 5.02% recorded on an annual basis by the Piraeus Bank Corporate Bonds Index, the new year for the corporate market started downwards as the index recorded a decrease of 1.03% on a monthly basis reaching 145 in January. , 7 units at the end of the month. In addition, the weighted average yield of the Index bonds recorded a decrease of 15 bp compared to the previous month, reaching 2.78%. Typically, almost all the bonds included in the Index showed losses with the most important movements being recorded by the bonds of ELLAKTOR maturing in 2024 (-3.56%), MOTOR OIL maturing in 2026 (-3.54%), FRIGOGLASS maturing in 2026 (-3.21%) and the PPC bond maturing in 2026 (-2.75%). Amid inflationary pressures and uncertainty in analysts’ expectations for the forthcoming interest rate hikes, the Premia bond maturing in January 2027 was included in the index, whose issue of € 100 million was almost doubled, while the final yield was 2, 80%. As a result, uncertainty about the ECB’s interest rate-raising timetable raises expectations for accelerating corporate issuance by 2022 in order to achieve refinancing of existing corporate debt at as low interest rates as possible.

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