The yield of the Cypriot 10-year government bond in the secondary market took a dive over the past few days, reaching the lowest levels ever and leading to a narrowing of the spread against the respective German security.
An analyst attributed the drop to media coverage on the occasion of Bank of Cyprus’s London Stock Exchange listing.
The price of the Cypriot 10-year government bond, maturing on November 4, 2025, rose to €107.15 on Monday morning, from €105.62 on Tuesday, pressing the yield to 3.30 per cent from 3.49 per cent respectively, documents prepared by Bank of Cyprus seen by the Cyprus Business Mail showed. The government issued the €1m bond in October 2015 at an average yield of 4.25.
A market analyst who spoke on condition of anonymity, citing the lack of authorisation to discuss the matter with the press, said that the drop in yields – which translates to a drop in risk as perceived by investors – may have been the result of investors searching for higher returns in an environment of low yields.
“If you are in zero-yields environment, and you have a government security which offers a 3.5 per cent yield of a euro area country with some prospects – I would not say a success story given the high stock of non-performing loans – you may go for it as an investor,” the source said. “Yields of 10-year German bonds were for a long time below zero and have only risen slightly, Italian bond yields are around 2 per cent and those of France at around 1 per cent. Even by investing a small amount in Cypriot bonds, it can result to a drop in yields”.
The difference of the yields to German 10-year bonds dropped to 288 basis points on Monday from 316 on Tuesday, according to the Bank of Cyprus documents, which reflects Cyprus’s non-investment grade sovereign rating. All four rating companies assigned Cyprus a junk rating, of up to four grades into the speculative area, with that from Standard & Poor’s being the highest at BB, which is two notches below investment grade.
“Spread has narrowed and this is what matters,” the analyst said.
The fundamentals of the Cypriot economy have not dramatically changed over the recent weeks for them alone to justify the sudden drop. The economy is forecast to expand 2.8 per cent in 2017, the same pace as in 2016, with public debt expected to gradually drop to below 90 per cent of gross domestic product by 2020, from around 108 per cent last year.
Political opposition to structural reforms resulted into a defeat for the government last month, when the parliament rejected a bundle of bills to overhaul the human resource management in the public sector. On top, non-performing loans continue to make up roughly half of the total loan portfolio and the private sector’s indebtedness exceeds 350 per cent of economic output. The external environment remains fragile while reunification talks have not yet produced concrete results.
The yield decline may be explained with increased visibility Cyprus received ahead or after the listing of Bank of Cyprus on the London Stock Exchange, the source said, adding that Cyprus has received coverage in the Financial Times and the Economist which made references to the full repayment of emergency liquidity to the European Central Bank on January 5, the economy’s prospects, the lifting of capital controls two years ago, and of course the high stock of bad loans.