Bank of America (BofA) expresses a positive outlook on Greek bonds, noting that they have begun to show greater resilience compared to their Italian counterparts.
However, the U.S credit institution also notes that European government bonds in general have not yet been significantly impacted by market turbulence, particularly concerning shifts in risk assessment.
According to BofA, Eurozone sovereign spreads are exhibiting a pattern similar to that of 2015, characterized by high QE flows and low volatility.
Nevertheless, Bank of America continues to perceive risks for Italian bonds, anticipating that their spread could widen beyond 160 basis points. In contrast, French bonds are trading modestly in anticipation of the budget and are expected to outperform subsequently.
BofA also comments on the sensitivity of Greek bonds to risk-on/risk-off phases, stating that this should remain lower than that of Italian bonds, making them more appealing.
BofA: European Bond Risk Pricing Appears Complacent
The bank highlights that the spreads on Eurozone government bonds are moving within relatively narrow ranges, trading at fairly low levels, and showing stability. This, according to BofA, is not far from what the broader risk sector is pricing, with corporate margins and equities also pricing relatively little compared to the risks.
Examining spreads with greater sensitivity, particularly focusing on the July sell-off, it becomes evident how different spreads tend to react under such risk regimes. Italy and Greece often lead these movements, while Spain, France, and Portugal change by about 60% of the magnitude.
Interestingly, Belgium (despite its smaller size, market exposure, and liquidity) may now outperform France in terms of risk regimes, concludes BofA.
Additionally, within higher credit quality groups, Ireland tends to move more idiosyncratically.
Italy and Greece have behaved similarly in terms of global risk on/off, corresponding to the first principal component of sovereign spreads.
However, more recently, Greece appears to be temporarily decoupling from the typical peripheral exposure to this risk factor, BofA notes.
The American bank generally believes this decoupling will continue, with Greek bonds exhibiting relatively lower volatility and sensitivity, although some aspects of recent behavior may be subject to repetition.
