Peripheral sovs should ride the momentum
Sovereigns should take advantage of positive spreads and rating moves to get funding
It was a good weekend for peripheral sovereign borrowers.
Greek prime minister Kyriakos Mitsotakis’ New Democracy party clinched a victory against its opponents with a larger-than-foreseen margin at the parliamentary election on Sunday, leading to a significant rally in Greek government bonds.
Although a second election is due in the summer as the party did not clinch an outright majority, the news has further fuelled the expectation that Greece could return to the investment-grade band within a year.
Already this year, Greek government bonds had been outperforming many European peers. Just four months ago, 10-year Greece bonds were yielding 34bp more than 10-year BTPs. At the end of last week they had traded to 24bp inside, and by Tuesday that gap had almost doubled to 47bp.
Yet BTPs have also had a good run lately, extending their gains over Bunds. The 10-year BTP-Bund spread was at 220bp at the end of 2022, having reached 250bp earlier in the year. On Monday it was at 185bp.
Italy too has clung onto its investment grade rating with Moody’s after the agency skipped making a possible move last Friday, though not many were expecting a downgrade to materialise.
Finally, also seeing a ratings lift this weekend was Ireland, with the sovereign gaining its highest rating from a major agency — AA from S&P — since the sovereign debt crisis in 2010. A potential upgrade could also be in the works for Portugal, with Moody’s putting a positive outlook on its Baa2 rating.
Greece, Italy and Portugal are still the most-indebted eurozone sovereigns as measured by debt-to-GDP ratio. But things are looking up.
Thanks to better-than-expected performance in public finances, Greece is only planning to issue €7bn of sovereign bonds this year and has already raised €6bn within the first quarter. With the help of economic and fiscal reforms, Portugal also cut its planned government bond issuance in 2023 by €4.6bn recently — to €15.2bn — with a goal to bring its debt ratio below than that of France and Spain this year.
The peripherals are a favourite of some investors, as they offer more attractive yields than the core and semi-core peers. Sovereign syndications from Greece, Ireland, Italy and Portugal this year were nearly six times subscribed on average, according to data compiled by GlobalCapital.
These sovereigns should move to ride the positive momentum of recent developments and make hay with the remainder of their issuance — especially those gunning up for some volume this year such as Italy, which has plans to issue more than €300bn of medium to long term bonds this year.
Others could equally benefit from the improved sentiment and look to push down the curve or launch debut products. Greece, for example, is looking to price its inaugural green bond in the second half of the year.
The peripherals will always have to suffer greater volatility — and higher risk premium. But right now they are favour, and issuers should make the most of that while they can.