Opens new trades in Greek bonds for …

By Eleftherias Kortalis

Société Générale once again opens the trading of Greek bonds against Italian bonds in order to “take advantage” of a possible surprise from S&P next Friday, April 21, becoming the first house to place Greece in the investment category. Although he believes that the most likely scenario, due to the elections, is that this promotion will come at the end of 2023 and the beginning of 2024, he does not want to miss any opportunity that appears, as he explains. Indeed, he maintains, if the surprise does not happen, he will close the deal again, as he did in February. At the same time, he also recommends an alternative trade with the aim of convergence of the Greece-Italy curve.

In particular, as noted by Société Générale, it proposed buying 10-year Greek bonds against Italian bonds in November 2022 based on the strong fundamentals of Greece and the dynamic recovery of investment grade in 2023. The French bank closed the trade because it had a very good performance and the Greek upgrade from Prior to Fitch in January did not surprise the markets. He explained that he refrained from returning to trading in March due to the turmoil in the credit market after the collapse of the SVB, especially since the Greek banking sector is still weaker than that of other EU countries.

As he pointed out, S&P and Fitch have rated Greece BB+ with a stable outlook, one step above investment grade. With fundamentals still supportive, he believes there is a significant chance of an upgrade in Greece’s credit rating this year. He adds that the International Monetary Fund has again revised its forecast for Greece’s debt-to-GDP ratio, and now expects it to drop to 160% in 2024, the lowest level since 2010.

According to SocGen, the most likely timing for Greece’s investment-grade upgrade is Q4 2023 or Q1 2024. That would be about a year after the last rating upgrade, according to the average pace of S&P and Fitch since 2015. Moreover, as parliamentary elections begin In may be unlikely to reflect structural reforms, uncertainty may prevent rating agencies from moving too quickly. Therefore, the upcoming April 21 S&P rating and the June Fitch rating are more likely to upgrade the outlook for Greece to positive than to upgrade the rating.

In any case, as Societe Generale points out, the upgrade to investment grade will have a very big impact on Greek bonds. When S&P upgraded Portugal to investment grade in 2017, Portugal’s 10-year bond spread against Spain fell by 36 basis points in the space of a week. This was because the markets were expecting a second upgrade from another home, and Portuguese bonds would soon be eligible to participate in most international bond market benchmarks. So far, markets have not prepared for such a sudden S&P rating upgrade for Greece, with Greece’s 10-year bond spread over Italy in a range of -10 to +35 basis points since December.

The two merchants

Based on the above, Société decided, as it explains, to reopen the trading of Greek 10-year bonds against Italian bonds, in order not to miss the possibility of a surprise, which is the rating upgrade by S&P on April 21. In addition, it expects a large supply of Italian bonds in the second quarter, while Greece has already raised €6 billion of its €7 billion issuance target for 2023. The current spread is 2 basis points, and the French bank has set a trade target at -30m. In the event of an increase in the evaluation level. However, as indicated by the trade, if the upgrade does not take place or the spread widens above 15 pips per second.

Instead, he proposes a new trade, “flattening 2-10 in Greek vs. Italian bonds” — that is, buying 10-year Greek bonds and selling 2-year bonds, selling 10-year Italian bonds in parallel with buying 2-year due to underperformance with Greece, Where the Greek curve is expected to converge with the Italian curve. He explains that the rating upgrade is unlikely to affect Greece’s default risk in the near term, and therefore the two-year Greek bond is likely to have very little impact. One such move occurred in Portuguese bonds in 2017, with a 2-10 decline in Portuguese bonds versus Spanish bonds by 28 basis points in a week. The current level for the new Greek trade he is proposing is -1 basis point and Societe Generale is targeting -40 basis points in the event of a rating upgrade and will exit trading if the upgrade does not take place or trade expands above 20 million barrels.

Risks: QT pauses on PSPP and Greek bond offering

QT so far has revolved around the classic QE, PSPP, at €15 billion per month. QT on PEPP is highly unlikely in 2023 as the ECB has indicated it will start in 2024 and ScoGen sees no reason to start earlier. Since there are no PSPP positions in Greek bonds, the current QT is weighted towards Italian bonds but not Greek bonds, he explains. If the ECB’s monetary policy stance changes significantly in the next two weeks and a QT pause is expected, the Italian 10-year bond is expected to outperform the Greek 10-year bond. This scenario, however, is relatively unlikely from her point of view.

Finally, as French banknotes, despite completing most of their 2023 issuance target, Greece recently announced that they will hold three auctions in the second quarter of 2023. The first will be held on April 19, just before that by S&P. If the auction includes a significant volume of Greek 10-year bonds, it could widen the spread for Greece and Italy just before the house’s rating day.