By Stelios Orphanides
The yields of Cyprus’s government bonds dropped dramatically in recent days pushing those of a bond maturing in more than eight years for the first time below the 2 per cent mark on Thursday, Bank of Cyprus said.
The yields of the bond maturing in November 2025 fell on Thursday to 1.89 per cent from 2.14 per cent on Wednesday and 2.31 on Monday, Bank of Cyprus said in an emailed statement on Thursday. The yield of the bond, auctioned in October 2015 at an average yield of 4.25 per cent which marked the official restoration of Cyprus’s market access, was 2.45 a month ago.
Various sources with knowledge of the matter interviewed by the Cyprus Business Mail said that the drop in yields, which affected all Cypriot government bonds traded abroad, is related to the latest decision of Standard & Poor’s (S&P) to assign Portugal an investment-grade rating for the first time in five-and-a-half years.
The reduction in secondary market yields is good news for Cyprus as its government debt stood at 107.8 per cent last year and is expected to exceed the annual economic output also next year. The government will have to repay or refinance almost €9bn in maturing debt until the end of 2023, including the instalments of the €2.5bn loan received from Russia almost six years ago.
“The market was pricing Cyprus together with Portugal, and after Portuguese yields dropped on Monday, it was expected that Cypriot yields would also follow,” one of the market participants said in a telephone interview.
The average yields of Portuguese 10-year government bonds, traded on Monday at 2.75 per cent, dropped on Thursday morning to 2.34 per cent, according to Bank of Cyprus.
A second source said that while Portugal’s exit from non-investment rating is one of the factors, also other external factors may have played a role in reducing the yields of the Cypriot bonds, including market expectations that the European Central Bank (ECB) will delay the increase of interest rates. On the other hand, the source said that the ECB’s signal that it will start tapering its expanded asset purchase programme this Fall, would have the opposite effect on bond yields.
Also, the decision of S&P, which rates Cyprus at BB+, a notch below investment grade, to place Cyprus’s sovereign credit rating on positive outlook on Friday, even though it is still in the junk area, may have played a part, the source said.
“Within the next 12 months we should expect an upgrade if not sooner,” he said.
“However, we need to wait and see whether Cypriot yields stabilise at these levels, reflecting also latest growth figures, or whether the drop is a market exaggeration,” he continued.
The general drop in yields also pushed for the very first time those of a Cypriot government bond into the negative area, according to Bank of Cyprus. The government bond maturing in June 2019 with a coupon rate of 4.75 per cent, which was the subject of buybacks in recent years, was traded at €108.56 which translates to a minus 0.14 per cent yield on the secondary market.
Cyprus was shut out of markets in May 2011 when the market took into consideration the repeated generation of extensive fiscal deficits by the government under former president Demetris Christofias, and the ties of the Cypriot banking system to Greece, which were severed under the terms of the 2013 bailout. As a result, the Cypriot economy remained unaffected after Greece was plunged into a fiscal and banking crisis in the summer of 2015, months after a Syriza-led government took office on a pledge to cancel the country’s bailout.
“The market stopped taking Greece into account when pricing us and links us with Portugal instead, which has similar problems,” the source said.
Cyprus’s economy which expanded last year 2.8 per cent and is forecast to grow this year 3.6 per cent, is plagued mainly by the high ratio of delinquent loans in the banking system which stood at 45 per cent in December, according to a report presented to the European Parliament in March.
The Iberian country which resorted to a bailout in April 2011 saw its economy expand 1.4 per cent last year. In December, the non-performing loans ratio in Portugal stood at 19.5 per cent.