BASIC FINANCE LESSONS- BONDS RISE = STOCKS FALL
- The upgraded estimate by several analysts for the ECB to raise its key interest rate by 0.75% from their initial estimates of 0.50% has set eurozone government bond yields on fire.
Today’s 10-year German yields are indicative of the anxiety creeping into the markets. Bund which amounted to 1.60%, of France at 2.20%, of Spain at 2.80% and of Italy, which has elections ahead of it, at 4.01%.
- The Greek 10-year bond is now trading above 4% with a strong chance of approaching 4.74% soon (52-week high) and next technical target at 5.04%.
However, the increased yields of government bonds drag the yields of corporate bonds upwards as well, even in companies with strong fundamentals and low credit risk.
- So even issues expiring in 2024 show almost 2x yields of their original coupons. Characteristic examples of such issues are ELPE with a yield of 3.27%, MYTIL with a yield of 4.29%, MOH with a yield of 3.4%, PPC with yields of over 6%, etc.
If the scenarios for a 0.75% increase are confirmed then chances are we will see further deterioration in bond markets and a rise in yields, both in government and corporate bonds.
- But as any first-year economics student knows, the stock and bond markets interact. When yields rise in bond markets (which carry less risk), equity markets are depressed, as investors demand higher dividend yields, depressing stock prices, since they are taking on more risk.
In addition, with inflation of 9.1% in the Eurozone and all fronts open, both in the domestic and the International environment, nothing predisposes to an improvement of the conditions for the next 6-months. Especially for Greece, however diligently ignored, the political risk is now here again for at least 9 months, according to the words of the prime minister.
- In addition, the acquired speed due to tourism gives a positive image to the Macroeconomic figures of 2022, but it is not at all certain that the phenomenon will be repeated with the same intensity in 2023, especially in an election year.
As for the excellent half-year corporate results of the majority of Greek companies, we estimate that they have not yet fully incorporated the effect of high energy costs, nor the possible drop in demand from high inflation that will begin to affect the purchasing power of consumers.
- Therefore, the belated reaction of the central banks to tame the historically high inflation by raising interest rates & limiting liquidity, seems to have continued, with negative consequences for global growth and bond and stock markets.
Appreciating the broader picture, both at the national and international level, we should be particularly wary of the continuation, since the geopolitical as well as the macroeconomic situation leave no room for complacency.
- The causes that have led the global economic system to today’s predicament have not changed and no one guarantees that they will be eliminated soon, and that they will not worsen in the coming winter.
Economist / Corporate Advisor