ITC: There has been a significant tightening between the 10y BTP-GGB spread: Year-to-date; the spread is down from 138bps to its lowest levels of 16.5bp.
10yr GGB – BTP Spd
The spread move is more shocking at 5y, with the spread tightening to 3.5bps from 93bps, having briefly slipped into negative territory (on a yield, if not Z-spread basis). Also, it’s worth noting that Wednesday was the second time that Greece borrowed with negative yield via 3m bills.
5yr GGB – BTP Spd
Capital Economics believes the 10y spread will turn negative in the near term.
+ The recent upgrade of Greece’s credit rating by one notch to BB- with positive outlook from S&P, brings it 3 notches closer to the Investment Grade and so PSPP inclusion. ECB buying would cause a 20bp further decline in yield according to Capital Economics, while Italian bonds have already profited from the PSPP.
+ Greece has the highest GDP growth (1.9%Y/Y) in the Eurozone and seems unaffected by the deceleration of European manufacturing PMIs, while the Italian economy is running at just 0.3% Y/Y.
+ Recent Greek privatisation programmes along with the Hercules plan to help banks cut their bad loans by 30bn euros, promoted by the newly elected Greek conservative government are signs that it is taking serious steps to improve its economic outlook. On the other hand, Italy still seems trapped in its political risks.