Why Greece Is Selling New Bonds At ‘Risk-Free’ Levels Akin To U.S. Treasurys

Date: 15.07.2019 / By Joy Wiltermuth / / Comments (0)
A sunny day for Greece?.

Greeks may have invented philosophy. But this week the seaside nation is testing out another idea: its bonds are roughly as risky as haven U.S. Treasurys.

Greece is borrowing about €2.5 billion euros in the international debt markets this week by selling seven-year bonds at a yield of 1.9%, according to Bloomberg report.

The bonds sale comes on the heels of an election that installed a new government led by Prime Minister Kyriakos Mitsotakis, sparking hope that Greece can finally turn the page on a decade of debt woes.

The nation after years of crisis only emerged from international bailouts last year.

Yet, it its new bonds will pay yields akin to those found on 10-year U.S. Treasurys TMUBMUSD10Y, +2.95%, which dropped to a 52-week low of 1.952% on July 3 and have hovered in the 2% range since, according to FactSet data.

That dynamic has left many market participants scratching their heads.

“Some have argued that the Greek yield is a result of better economic conditions in Greece,” Mark Grant, chief global strategist at B. Riley FBR Inc. wrote on Tuesday in a note to clients. “With all due respect, that argument is a fallacy based upon a fantasy laid bare in a pipe dream.”

Grant, and others, say a more obvious reason is the hunt for yield amid a near $13 trillion pile of government debt that now offers negative yields.

The prospect of additional stimulus from the European Central Bank, including a possible resumption of its asset-buying program, has also provided a de facto backstop to government bonds issued in the eurozone. The ECB’s past bond-buying efforts were credited with sending yields on bonds from the regions’s weaker economies sharply lower.

Bank of Greece Gov. Yannis Stournaras last week told the Kathimerini newspaper that Greek participation in an ECB QE program may be feasible soon, according to Bloomberg. Greece’s sub-investment-grade ratings would normally rule out its participation, while Stournaras told the newspaper that it wasn’t easy to estimate how long it would take Greece to regain an investment-grade rating.

The following chart from FactSet shows the stark decline in Greek 10-year bonds since 2012, which reached 15% four years ago.

“You’ve got a buyer that has an inelastic appetite,” Jack McIntyre, a global fixed-income portfolio manager at Brandywine Global, said of the ECB in an interview. “Unlike the private sector, or with real money traders who care about what price they pay for an asset, central banks don’t.”

McIntyre said that far-reaching influence of global central bank has left investors playing by their own rules.

“This stuff was never in the economic textbooks,” he said.

But one way investors have been combating falling yields, at least in the U.S., has been to use currency hedges.

“If you are a U.S. investor and invest in euro bonds and hedge back into dollars, you’re being paid almost 3%,” said Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman, in an interview.

“It is a little counter intuitive.”

Another tactic is to avoid negative yielding assets altogether by investing in real estate and stocks with growing dividends, said Deron McCoy, chief investment officer at Signature Estate & Investment Advisors, a Los Angeles-based wealth adviser.

“Sometimes investors are like a frog in a pot of boiling water. They get used to it,” McCoy said. “But at some point, a negative-yielding bond is going to have negative returns. That is just math.”

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