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Developments in the Greek government bond market - August 2007

07/09/2007 - Press Releases

As the turmoil in international financial markets intensified during August, government bonds recorded further gains given investors’ continuing search for safer forms of investment. Indications that the crisis in the US sub-prime mortgage market had also affected financial institutions outside the US and the risk of contagion to the rest of the economy led to a sharp decline in market confidence. In addition, credit conditions deteriorated significantly. All this led the central banks in major economies to provide extra liquidity to financial markets, with the FED also lowering the discount rate by 50 basis points (bps), in order to restore calm. Therefore, given the persistent uncertainty about the developments of the current financial crisis and its consequences on global growth, investors started reassessing their expectations for future monetary policy moves by the FED and the ECB with many expecting the FED to ease monetary policy earlier than originally anticipated and the ECB to postpone interest rates increases.

On the Greek electronic secondary securities market (HDAT), government bond yields fell with the only exception of the 30-year bond yield that rose marginally, in line with the performance seen in the rest of the Euro-zone markets, in addition trading volume was extraordinarily low, given the ongoing financial market crisis and yield spreads with respect to German bonds widened further.

More in details, the sharpest fall in yields was at the short end of the curve with the 3-year benchmark bond yield declining by 22 basis points (bps), to 4.22% at the end of August from 4.44% at the end of July, while on the long end of the curve the 10-year bond yield fell by 10 bps, to 4.59% from 4.69%, and the 15-year bond yield fell by only 1 bps, to 4.86% from 4.87%. In addition, the 30-year benchmark bond yield rose by 3 bps to 4.95% at the end of August from 4.92% at the end of July. As a consequence, the yield curve became significantly steeper, with the yield difference between the 30 and the 3-year bond yields widening to 73 bps from 47 bps at the end of July. Finally, the average monthly spread between the Greek and the German 10-year benchmark bond yields widened further in August to 31 bps from 27 bps in July.

Benchmark bond prices rose along the whole maturity spectrum except for the 30-year bond. The biggest price increases, by 78 and 74 bps respectively, were recorded by the 10-year benchmark bond that closed at 97.63 on August 31 from 96.85 on July 31 and by the 5-year benchmark bond that closed at 98.71 from 97.97. The 3-year benchmark bond price rose by 45 bps to 98.59 at the end of August from 98.14 at the end of July, while the 30-year bond price fell by 48 bps to 94.27 from 94.75.

Trading volume on HDAT in August fell noticeably to EUR 28.43 billion worth of transactions compared to EUR 55.74 in July and to EUR 42.98 billion in August 2006. The daily average turnover was EUR 1.29 billion compared to EUR 2.53 billion during the previous month. The most actively traded bond was the 10-year benchmark with EUR 8 billion worth of transactions followed by the 10-year bond, maturing 20/7/2016, with EUR 2.7 billion. Of the 5,287 orders executed on HDAT, 49.5% were “buy” orders and 50.5% “sell” orders.

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