Bloomberg News

Greek Bonds Turn Into World Beaters as Default Concern Ebbs

July 01, 2011

(Updates bond yields from sixth paragraph and stocks performance in ninth paragraph.)

July 1 (Bloomberg) -- Investors wise enough to bet on Greek bonds as the nation’s two-year yields climbed to a record 30 percent have been rewarded with the best returns of any sovereign-debt market during the past two weeks.

Greek securities returned 5.6 percent since June 16 through yesterday, the most among 26 indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spain was second with a 1.3 percent gain, while German debt lost 0.8 percent and U.S. Treasuries fell 1 percent, the indexes show. The euro rose 2.1 percent against the dollar in the period.

Yields on two-year notes plunged 4.24 percentage points since mid-June as Prime Minister George Papandreou survived a no-confidence vote, changed his finance minister and pushed 78 billion euros ($113 billion) in new austerity measures through parliament, positioning Greece to receive more European Union aid. The nation passed a “critical milestone” to avoid the euro area’s first default, Papandreou said yesterday.

“Some of the more aggressive hedge funds might have been tempted,” said David Scammell, who manages $7.3 billion in European government bonds at Schroders Plc in London and who doesn’t own any Greek debt. Speculators who bet prices would fall may have closed out positions, while domestic investors “get comfort from the high yields,” he said.

Greek Notes Climb

The two-year note yield fell for a fourth day, dropping 123 basis points, or 1.23 percentage points, to 26.07 percent as of 4:15 p.m. in London. It climbed to a record 30.32 percent on June 16 as Papandreou struggled to win support for budget cuts and Standard & Poor’s cut the nation’s debt ranking to CCC, the world’s lowest sovereign rating.

Ten-year bond yields declined to 16.33 percent from 18.35 percent on June 17, the highest since the euro’s 1999 introduction. Greek bonds have still lost 16 percent this year, EFFAS indexes show.

“Greece is giving it a go and there’s some sort of political will,” said Harvinder Sian, a senior bond strategist at Royal Bank of Scotland Group Plc in London. “The country hasn’t fallen apart, and political factions haven’t split completely. Yield levels are still at default levels.”

Greek stocks also rallied in the second half of June. The benchmark ASE Index jumped 8.3 percent since sliding to a 14- year low on June 16. National Bank of Greece SA, the nation’s biggest lender, rallied 19 percent, and EFG Eurobank Ergasias SA, the second-largest, rose 20 percent.

Credit-Default Swaps

Credit-default swaps on Greek government debt were at 1,875 basis points today, according to CMA. That signals an 80 percent chance the country will default within five years. The swaps pay buyers face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to debt agreements.

Euro-region finance ministers will convene tomorrow by teleconference. They are set to approve the next aid payment for Greece and outline the terms for a second rescue. The meeting had earlier been scheduled for July 3 in Brussels.

Greece may receive as much as 85 billion euros in new financing, including a contribution from private investors, in a second bailout aimed at preventing default, according to an Austrian Finance Ministry official. The International Monetary Fund will put up 30 percent of the new funds, with euro-region countries and private investors contributing the remaining 70 percent, Thomas Wieser, head of the ministry’s economic policy and financial markets department, said at a briefing with Finance Minister Maria Fekter in Vienna late yesterday. European Union finance chiefs also hold a conference call tomorrow to free up a 12 billion-euro payment overdue from the original rescue.

‘Voluntary’ Roll-Over

German banks agreed to roll over the Greek bonds they’re holding that mature through 2014, which amount to about 2 billion euros, Finance Minister Wolfgang Schaeuble said yesterday in Berlin. The country’s so-called bad banks will provide 1.2 billion euros as well, he said.

French President Nicolas Sarkozy said this week that the nation’s banks are headed for a “voluntary” agreement to roll over most of their holdings of Greek debt.

Deutsche Bank AG Chief Executive Officer Josef Ackermann, at a conference in Berlin two days ago with German Chancellor Angela Merkel, said that financial companies would contribute to help avert a “meltdown.” German and French lenders are the biggest foreign holders of Greek debt, and their participation would help the EU meet a goal of getting banks to roll over at least 30 billion euros of the nation’s bonds.

‘Excessive’ Safety Trade

“We’re seeing a little bit of an unwind of the excessive flight-to-safety trade that has dominated over the previous few weeks,” said Padhraic Garvey, the head of developed-market debt at ING Groep NV in Amsterdam. “If this were the beginning of the end of the crisis, we should be targeting single-digit yields for Greece.”

Trading in Greek debt diminished as the crisis intensified, which may have exaggerated price changes, according to Bill Blain, head of the Special Situations Group in London at Newedge Group.

Greek government bond trading on the electronic secondary securities market known as HDAT dropped about 50 percent to 695 million euros in May from the previous month, the Bank of Greece said June 20. Traded volume fell from 1.39 billion euros in the same period a year earlier. Of the 639 trading orders executed on the HDAT system, 62.4 percent were sell orders.

“Just how volatile the market is and how bouncy it can be is a factor of a nervous market,” said Blain. “The fact that very few bonds will move the market one way or the other.”

--With assistance from Andrew Rummer and Abigail Moses in London. Editors: Daniel Tilles, Dennis Fitzgerald

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at; Keith Jenkins in London at

To contact the editor responsible for this story: Daniel Tilles at

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