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Greece Returns To The Bond Market With A Present To Its Last Group Of Bond Buyers

On the same day that Greek PM Alexis Tsipras triumphantly announced to The Guardian that "The worst is clearly behind us", Greece just as triumphantly announced that its long-rumored bond issue, the first after a three year hiatus which saw its last bond issue crash then surge, is now a reality. Just like in 2014, Greece is looking to sell another batch of five-year bonds, according to an Athens Stock Exchange filing. The bonds will be sold in benchmark size via a legion of banks, and are expected to price on Tuesday. In terms of total size, it will ultimately depend on client demand - recall that the the 2014 issue was 8x oversubscribed - with UBS expecting a possible size of €2BN-4BN while JPMorgan anticipates roughly €3BN in new bonds.

But the biggest surprise in today's announcement was the present for its latest batch of bond buyers: a cash tender offer for its existing 4.75% bonds due in 2019 - the same bonds that were issued in 2014 - which will be bought back at a price of 102.6. The 2019 bond have jumped in recent weeks, with the yield dropping around 15bps, though as Bloomberg notes "hardly anything has traded as is usual in Greek bonds." The bond was priced around 102.25 ahead of the announcement, before rising another 30c.

Greek 10Y bonds are currently yielding 5.28%. Putting this in context, at the peak of the financial crisis in 2012, when Greece was expected to leave the euro area, the yield surged to a record 44.21 percent.

With the latest bond sale, Tsipras government is seeking to pave a path for an exit from the current bailout program, which ends in August 2018, while also capping the country’s financing needs in 2019, expected to be about 19 billion euros ($22.1 billion). After not being able to convince creditors to reduce its debt burden and being left out of the European Central Bank’s bond-purchase program, Greece is testing the market, although it still remains to be seen if Greece will be added to the ECB's QE program.

Greece delayed its return to the bond market last week due to a €325 billion ceiling set by the IMF on how much debt the country can hold. Workarounds, like the infamous debt swaps that pushed Greece into its crisis in the first place, could improve Greece’s maturity profile without increasing the overall load according to Bloomberg, and can ease the government’s forays into the market.

In other words, we are right back where we started: with everyone agreeing to mask the total amount of unrepayable Greek debt, which obviously will not matter to yield-starved credit investors who will be delighted to give billions to Greece in exchange for a yield in the 4%+ range. After all, by the time the debt comes due, it will be someone else's problem.

The bond sale follows the successful conclusion of the second bailout review and the disbursement of the first part of the €8.5BN tranche by the ESM on July 10. The IMF agreed to a new $1.8 billion conditional loan for Greece on Thursday, with disbursement contingent on euro-zone countries providing debt relief. Helping to ste the stage for today's announcement, on Friday S&P raised the country’s sovereign credit-rating outlook to positive, even though it kept the Greek rating at B-, 6 levels below investment-grade.

Some were cautious: “Having failed to achieve anything substantial on debt relief or having Greece admitted into the ECB’s asset purchase program, the objective of the Syriza government is now a ‘clean exit’ when the bailout expires next year,” said Eurasia's Mujtaba Rahman. “This will be the first leg of that strategy – to test market appetite while simultaneously building cash buffers ahead of next year.”

Meanwhile, the euphoria is already palpable: “they’ve been doing well,” said Mohit Kumar, head of interest rates strategy at Credit Agricole CIB. “Psychologically, yields are below levels when they last came to the market. And it’s a good time to issue because if ECB starts tapering post summer, peripherals would come under pressure. ”

As Landesbank Berlin's Lutz Roehmeyer told Bloomberg, it’s “perfect timing: it is after getting bailout money, after getting the go ahead for a debt reduction next year, after IMF said it is likely to join the bailout finally, after S&P rating action and still before ECB ends QE and started raising rates.”

Naturally, Roehmeyer already holds Greek bonds and plans to take part in the new issue.