Greece’s five-year bond yield fell below zero for the first time on Monday after the European Central Bank’s decision to maintain the pace of its asset purchase programme spurred a rally in riskier eurozone debt.
The move means that investors are in effect prepared to pay Athens to borrow for up to half a decade, despite debt levels that have soared to more than 200 per cent of GDP during the pandemic. Italy is now the only eurozone member with positive five-year borrowing costs, albeit only marginally above zero per cent.
Bond markets in the bloc wobbled in May on speculation that the ECB would soon respond to an economic rebound by reducing the size of bond purchases under its €1.85tn emergency pandemic stimulus package. But the market recouped its losses after ECB officials talked down the likelihood of “tapering”, and then followed through by sticking with its recent pace of buying at last Thursday’s policy meeting.
“We’re seeing this rally because the ECB has reassured the market it won’t imminently remove the punchbowl,” said Richard McGuire, rates strategist at Rabobank.
For Greece, negative five-year yields are the latest milestone in a stunning comeback since the country was locked out of bond markets and needed a series of bailouts during the region’s debt crisis a decade ago. Athens capitalised on the recent rally by selling €2.5bn of new 10-year bonds last week, a deal that attracted a record €30bn of orders. Despite having one of the highest debt levels in the world, relatively little is in the hands of private investors with much still in the form of bailout loans from the EU, or purchased by the ECB.
Some investors say they are happy to own bonds issued by countries such as Greece and Italy — which despite very low yields offer a pick-up relative to deeply negative German rates — because the central bank is likely to counteract any meaningful rise in borrowing costs that could set back the recovery.
The ECB’s pushback against tapering speculation came at a time when so-called spreads between Germany’s borrowing costs and those of more indebted eurozone members were widening.
“In the near term the ECB is very, very clear,” said Nic Hoogewijs, a portfolio manager at Lombard Odier Investment Managers. “They do not want to see a tightening of financial conditions, and funding costs for sovereigns really is key.”
Hoogewijs said the firm owns higher-yielding sovereign bonds across the euro area despite the explosion in debt levels brought about by the pandemic. “You can’t really position on sovereign spreads based on economic fundamentals. That’s not what drives pricing,” he said.
Investors are unlikely to bet against Greek or Italian debt as markets head into a potential summer lull, according McGuire. However, as the economic recovery gathers momentum, talk of tapering is likely to return.
“The ECB has bought time,” he said. “But as we edge towards September there’s a likelihood we refocus attention on the winding down of stimulus.”