Weekly Bond Update: Greece contemplating a comeback

Michael Boye, CFA Fixed Income at Saxo Bank

  • Since 2010 the Greek debt crisis has posed a threat to Europe’s financial market
  • The EU and IMF have committed to another round of emergency loans for Greece
  • Bond investors reportedly will be asked to invest in new Greek government bonds
  • Will Greece’s history of near-default scare today’s yield-starved investors?

The saga of the Greek debt crisis has been a recurring theme in financial markets ever since the debt problems first surfaced and led to the initial bailout in 2010. On several occasions since, it has threatened to shake up the monetary union, posing a constant threat to financial market stability in Europe.

But now the menacing clouds seem to be clearing over Athens. More than three years – and another bailout – since it last tapped intentional bond markets, the Greek government is said to be on the verge of issuing new government bonds again.

Some investors won’t forget the last time, which quickly turned into a grim tale for bond holders. In the summer of 2015, following a resounding public vote to dismiss Brussels-imposed austerity policies, Greece was within hours of leaving the common currency, which in turn saw the newly issued bonds trade as low as 40 cents on the euro.

This latest round of optimism comes after another 11th hour deal between Greece and its creditors, in which the European Union and the IMF (after much hesitation) have committed themselves to another round of multi-billion euros worth of emergency loans. What’s even more encouraging for the long-term prospects is that the deal includes yet to be specified debt relief, raising hopes that Athens will be able to stand on its own feet again within the near future.

The first reality check of this hope could be due already within a few weeks when bond investors reportedly will be asked to invest in brand new government bonds, expected to be in the shape and form of five years tenure and size of potentially more than €3 billion.

For the Tsipras-led government it would be quite the statement as well as reward for years of painful and domestically detested economic reform. However, adding to the urgency is undoubtedly the frothy sentiment of current bond markets, which has already seen Greek government bonds rally to the strongest level in years. In June, the benchmark 10-year government bond yield dropped below the 2014 low, the point in time when the troubled lender last reached out to bond markets. Recent history hasn’t been short on volatility, as in the meantime investors have been requiring as much as 14% for these bonds, while the current level of 5.25% is the lowest level since 2009!

But Greece is not the only debtor looking to finance. The hunt for yield in bond markets has seen several used-to-be-in-bad-standing bond issues rushing to sell new bonds this year – recently exemplified with Argentina’s 100-year bond issuance.

As was the case for Argentina, Greece’s history of near-default may not scare yield-starved investors today, but if history is of any guidance, there is no promise bond investors’ nerves won’t be tested again.