Greek bond prices soared due to the Prime Minister’s election victory

The discount on Greek government bond yields to Italy’s rose to their highest level since at least 1999 after the prime minister’s election victory, underscoring investors’ growing perception that Athens is now less risky than Rome.

The yield on 10-year Greek debt fell more than 0.15 percentage point to 3.85 percent on Monday as markets reacted positively to the result, leaving Kyriakos Mitsotakis’s party just four seats short of the 150 seats needed for a parliamentary majority. A new vote was scheduled for next month. As prices rise, returns fall.

The move means the gap — or spread — between Italian bond yields over Greek bond yields is at its widest since at least 1999, according to Bloomberg data. The Italian debt yield is 4.3 percent.

Greece and Italy are seen as the two riskier debt markets in the EU, but Greek debt yields have traditionally been 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.

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The spread briefly turned negative a few times – meaning Greece’s borrowing costs were lower than Italy’s – most notably in late 2019.

Most recently, in April of this year, the spread turned negative again and has been increasing as Greece moves closer to restoring its investment grade status.

Line chart of yield spread (basis points) showing that the spread between Greek and Italian debt has fallen to a record low

“For once, the market got it right,” said Holger Schmieding, chief economist at German investment bank Berenberg.

“Italy is doing extremely well under Giorgia Meloni. But under Kyriakos Mitsotakis, Greece has become a star performer among the most important eurozone countries,” he said.

Greece and Italy were also among the bloc’s best-performing bond markets this year. ICE Bank of America’s Italian bond index shows a total return of 2.7 percent to date, while its Greek counterpart gained 4.2 percent. This compares to the 1.2 percent yield in the Eurozone.

Monday’s drop in 10-year Greek bond yields to 136 basis points, the lowest level since November 2021, narrowed the spread on German bonds, a popular measure of risk.

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Analysts say the spike in Greek bond prices was likely driven by “fast money” investors buying the bonds ahead of an upgrade to investment grade status, which would open up Greek bonds to a wider range of investors.

Richard McGuire, head of interest rate strategy at Rabobank, said hedge funds closing out short positions, which surged ahead of the election, may have also boosted the Greek bond market on Monday.

According to Sean Kou, fixed income strategist at Société Générale, “an [investment grade] refresh [for Greece] it is now priced in”.

After rising to 206 percent during the pandemic, Greece’s public debt-to-GDP ratio fell to 171 percent last year, the lowest level since 2012 and one of the fastest rates of debt reduction in the world.

It is expected to decline further in 2023, helped by high inflation, flexible growth and the primary budget surplus. Italy’s debt-to-GDP ratio ended last year at 144.4 percent, which was below 150 percent a year earlier.

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Greece’s debt-to-GDP ratio “looks set to fall below Italy’s level by 2026,” Berenberg Schmieding said. In addition to strong growth, Greece also benefits from the fact that most of its debt is still owned by the EU institutions that bailed it out a decade ago, making it “less exposed to interest rate hikes than other economies.”

Steffen Dyck, a senior vice president at Moody’s, said the weekend’s election result was “credible” for Greece as it would “point to continuity in fiscal and economic policy” and improve “the outlook for further significant budget cuts.” the country is burdened with debt.