Reserved optimism on bonds, yields lower on QE talk
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.