Re­served op­ti­mism on bonds, yields lower on QE talk

Financial Mirror (Cyprus) - - FRONT PAGE -

Fi­nance Min­is­ter Haris Ge­or­giades said on Tues­day that the lower yield on Cyprus bonds is en­cour­ag­ing and re­in­forces the ini­tial tar­get set by the gov­ern­ment for a re­turn to the mar­kets this year.

The gov­ern­ment plans two bond is­sues in 2015 to cover part of the debt of EUR 2.9 bln that must be re­fi­nanced.

Ge­or­giades was quoted by Stock­Watch as say­ing that his pos­i­tive re­ac­tion of the Cypriot bonds is linked to the ECB decision for quan­ti­ta­tive eas­ing, how­ever, he is re­served, as this pos­i­tive re­ac­tion must have depth of time.

“As we were not pan­icked by the in­crease in the yields of the Cypriot bonds above 5%, we now face this re­duc­tion with cau­tious op­ti­mism”, the Min­is­ter stressed.

The yield of the Cypriot 10-year bond (ma­tu­rity 2020) re­mained sta­ble after Draghi’s an­nounce­ments.

It fell on Fri­day af­ter­noon and on Mon­day it was at 4.8%, the low­est since the end of De­cem­ber.

Ge­or­giades said it was en­cour­ag­ing that although the as­sess­ment of the eco­nomic adjustment pro­gramme has been sus­pended, the ECB decision for quan­ti­ta­tive eas­ing has con­trib­uted sig­nif­i­cantly to the re­duc­tion of the yield of the Cypriot bonds.

He added that the out­come of the elec­tions in Greece does not af­fect Cyprus neg­a­tively and em­pha­sised that it is im­por­tant that the eco­nomic pro­gramme re­turns to nor­malcy and its eval­u­a­tion con­cluded with pos­i­tive re­sults.

Bond yields saw one of their big­gest drops on Fri­day on the back of the ECB’s decision to em­bark on an ex­tended bond-buy­ing pro­gramme.

The 10-year bond (ma­tur­ing 2020) yield dropped by 58 ba­sis points on Fri­day, de­clin­ing to 4.87% com­pared to 5.35% on Thurs­day, the day of Mario Draghi`s an­nounce­ment. The yield of the 5-year bond (ma­tu­rity 2019) dropped to 4.77%, be­low the 4.85% marker regis­tered at the ini­tial auc­tion on June 18, last year.

The down­ward tra­jec­tory of the bond yields comes as a re­sult of the ECB’s decision last Thurs­day to com­mence a quan­ti­ta­tive eas­ing pro­gramme which sparked broader pres­sure on the yields of eu­ro­zone mem­ber­states, KPMG board mem­ber, Tas­sos Yi­asemides was quoted by the C¡∞ as say­ing.

“The drop in the yields is a re­sult of the gen­eral re­duc­tion that emerged in the yields of eu­ro­zone mem­ber-states after the ECB’s decision to buy gov­ern­ment bonds from the sec­ondary mar­kets,” he said.

He ex­plained that yields will de­cline, from the minute ECB can po­ten­tially in­crease de­mand for eu­ro­zone mem­ber-state bonds. Yi­asemides pointed out that the ECB decision pushed the yields of mem­ber-states such as Italy, Spain and Por­tu­gal to their all­time lows.

Cypriot bond yields main­tained their down­ward tra­jec­tory on Mon­day with the 10year yield de­clin­ing to 4.85% whereas the 5year yield edged to 4.74%. The yield of the 10-year bond de­clined to a four-year low on Septem­ber 8, 2014, but fol­lowed an up­ward tra­jec­tory as Cyprus failed to im­ple­ment a law on fore­clo­sures of mort­gaged prop­er­ties, an im­por­tant pre­req­ui­site of its EUR 10 bln fi­nan­cial as­sis­tance pack­age.

Un­der the ECB decision, the bond­pur­chases will be made by the Cen­tral Bank of Cyprus, which will as­sume 80% of the risk. Ac­cord­ing to CBC cal­cu­la­tions, it could buy bonds up to EUR 500 mln, which cor­re­sponds to 25% of Cypriot bonds cur­rently be­ing traded in the sec­ondary mar­kets. This would as­sist the Fi­nance Min­istry’s aim to tap the mar­kets twice in 2015.

“The de­cline in the Cypriot bond yields and the ECB decision al­low Cyprus to plan its exit to the mar­kets in a bet­ter way,” Yi­asemides noted, adding that cer­tain is­sues re­main to be ex­am­ined such as com­pli­ance with cri­te­ria for Cyprus to par­tic­i­pate to the bond-buy­ing pro­gramme.

Junk-rated bonds can­not be in­cluded in the ECB’s bond-buy­ing pro­gramme, but Cyprus can take part un­der the pro­vi­sion that it im­ple­ments its eco­nomic adjustment pro­gramme.

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