Investors Who Held Nerve With Greece Reap World’s Best Bond Returns

 February 25, 2015

(Bloomberg) — Bondholders who held their nerve as Greece sparred with the euro region are being rewarded with a world-beating return of 11 percent this year.

Sticking with Greek securities through the election of the anti-austerity Syriza party a month ago — and the turmoil of ensuing funding negotiations — earned investors more than double the 4.2 percent profit on Danish securities, the next-best performers, according to Bloomberg indexes. Treasuries earned 1.2 percent in the same period.

Traders of Greece’s bonds were relatively sanguine as they braved heightened volatility and warnings from strategists that the nation risked an exit from the currency bloc. Their resilience kept the 10-year yield below its five-year average throughout the upheaval, and by Tuesday, when euro-area finance chiefs approved an extension of financial aid, it was more than a percentage point lower than its Dec. 31 close.

“You would have bought these bonds knowing the political risk could rise with Syriza ahead in the opinion polls, thus have a reasonably high tolerance,” said Orlando Green, a fixed-income strategist at Credit Agricole SA’s corporate and investment banking unit in London. “There isn’t a lot of trading so you really have to buy and hold.”

Bondholder Reassurance

Almost immediately after Syriza won power with its pledge to scale back Greece’s economy drive, new Finance Minister Yanis Varoufakis traveled to London to address about 100 financiers, telling them he didn’t plan a debt writedown, according to a person who attended the meeting.

That may have helped reassure investors including Pacific Investment Management Co. and hedge fund Greylock Capital Management, who had said they still saw value in Greek securities after the election.

Negotiations between Greece and international creditors then broke down on Feb. 16, and the Greek government said it couldn’t accept “absurd” demands from the institutions. Commerzbank AG responded by raising its estimate on the chances of the nation leaving the euro to 50 percent from 25 percent.

The bond market remained calm, relative to moves earlier this decade. The Bloomberg Greece Sovereign Bond Index, a market-value weighted measure of Greek bonds, was at 100.80 on Tuesday, 38 percent higher than its five-year average.

And while the 10-year yield rose as high as 11.40 percent on Feb. 2, the rate had climbed to 44.21 percent in 2012, when bondholders agreed to write off 100 billion euros ($113 billion) of Greek debt as part of the biggest reorganization in history. The yield was at 8.88 percent at 2:57 p.m. London time Wednesday. The five-year average is 13.87 percent.

‘Strong Stomach’

That restructuring also played a part in Greece’s 240 billion-euro international bailout from the European Commission, European Central Bank and International Monetary Fund, which came with the economic reforms Syriza contested.

Euro-region finance ministers agreed to a new package of economic measures for Greece on Tuesday, paving the way for loans to continue flowing to the country. The existing program, which had been keeping Europe’s most indebted state afloat since 2010, was scheduled to expire at the end of this month.

“You would have had to have a very strong stomach,” said Richard McGuire, head of European rates strategy at Rabobank International in London. Current yield levels are “notably better, certainly relative to other debt markets, than the peak at the beginning of the year. There still remains considerable scope for intermittent tension, but as long as it remains within a context of a bailout then it should be contained.”

‘Concrete Agreement’

Even so, the reprieve is only due to last for four months, and Greek three-year note yields, at 13.22 percent, remain higher than those on 10-year bonds, implying some investors are concerned they may not get repaid in full. The three-year yield compares with 3.5 percent when the debt was sold last July.

“The market has read developments between Greece and its partners as very constructive,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris. “But they will need a more concrete agreement and more certainty about the ability of Greece’s funding within the next couple of years, not months.”

For now, the faithful can enjoy their rewards. Bonds rose for five days through Tuesday. Greek equities have recovered losses that pushed the ASE Index to a more than two-year low in the wake of the election. It fell 1.6 percent on Wednesday after jumping 9.8 percent the day before.

“Given these yield levels of 10 or even 15 percent that we’ve seen on the three-year Greek government bonds, you’ve got of course tremendous carry,” said Christian Lenk, a fixed-income analyst at DZ Bank AG in Frankfurt. “However, I do think just looking at Greek bonds from that perspective is short sighted. Investments of that kind are a special kind. For more traditional fixed income investors Greek bonds are a non-investible asset at the moment.”

To contact the reporters on this story: David Goodman in London; Lucy Meakin in London at

To contact the editors responsible for this story: Paul Dobson Rodney Jefferson


Nuria Pujol