Greek debt sale ‘bodes well’ for busy eurozone issuance

What is expected to be a busy month for eurozone bond markets got off to a flying start on Wednesday, as Greece enjoyed strong demand from investors for the country’s 10-year debt.

Eurozone countries are on course to issue some €130bn of new debt in September as markets fire up after a slight lull in August, according to analysts at Commerzbank. That would double last September’s total as governments increase borrowing to fund responses to the Covid-19 crisis.

Investors submitted more than €18bn worth of bids for the sale of €2.5bn of Greek bonds maturing in 2030, in a sign that investors’ appetite for higher-yielding eurozone bonds remains undimmed. Also on Wednesday, Germany attracted more than €33bn of bids for its first ever green bond.

The Greek sale “bodes well for the coming weeks with the huge amount of sovereign issuance that’s on the way,” said Michael Leister, head of interest rate strategy at Commerzbank.

Greek bonds have benefited from inclusion in the European Central Bank’s Pandemic Emergency Purchase Programme (PEPP), which was launched in March and expanded in June. Under previous rounds of asset purchases by the ECB, the country’s bonds did not qualify thanks to Athens’ “junk” credit rating.

The majority of Greece’s debt remains in the form of loans from the EU and IMF, a legacy of a series of bailouts during the financial crisis. Athens also has a cash buffer of more than €35bn, leaving it less reliant on bond markets for funding than its eurozone peers. However, the government has moved to take advantage of borrowing costs which touched record lows in early August, as 10-year yields dipped below 1 per cent.

They have risen since, with Wednesday’s sale pricing at a yield of 1.22 per cent — still well below the 1.57 per cent Athens paid at the previous 10-year bond sale in June. Yields had spiked higher in March at the height of the coronavirus crisis, climbing above 4 per cent before the ECB’s intervention helped to calm markets.

Philip Brown, head of public sector debt origination at Citi, one of the banks on the Greek deal, noted that strains on lower-rated eurozone nations were eased further by July’s deal between EU leaders to create a jointly-backed €750bn fund to help economies recover from the pandemic. “The cohesion shown by Europe is really attracting investors to peripheral markets in the eurozone,” he said.

Greece still has the highest-yielding bonds in the euro area, despite the recent falls, meaning it is attractive to investors. Much of the highest-rated debt issued by member states trades at sub-zero yields.

“We’re still in an environment where anything with a yield is an easy sell,” said Rabobank strategist Richard McGuire.