Get me to the Greek

George Yacik - Contributor - Fed & Interest Rates

OK, so it’s not the most original headline. But it reveals the thinking of some savvy investors, and I think they have a good point.

Baron Rothschild, the 18th century British nobleman and member of the Rothschild banking family, is credited with saying, “The time to buy is when there’s blood in the streets.”

I haven’t heard that there is actual blood running in the streets of Athens or other Greek cities, but it’s pretty close, financially speaking, which means it may be time to be buying Greek bonds.

We all know by now that after taking the most seats in the January 25 parliamentary election, the left-wing Syriza party formed a coalition government with the small right-wing Greek Independence Party. The one thing the two have in common is opposition to anti-austerity measures imposed on Greece by the European Central Bank and European Union as conditions for earlier financial bailouts and more in the future. There is also the fear that the Syriza-led government wants to secede from the EU, although that seems unlikely to happen.

Not surprisingly, investors have fled from Greek assets in droves and pulled their money out of Greek banks.
The Athens Stock Exchange General Index, or ASE, has tanked more than 40% since last March, nearly 13% since the election. Government bond prices have likewise plummeted, sending yields soaring. The yield on the 10-year bond jumped more than 200 basis points after the Syriza win and now yields more than 11% as of Friday.

But yields on shorter-term securities, which have the highest risk of default, have skyrocketed. Bonds maturing in 2019, for example, issued last year at a yield of just under 5%, were trading last week at over 13%. Three-year notes were trading at 19%.
In this yield-starved world, numbers like that, not surprisingly, have caught some people’s attention. But are Greek bonds a screaming buy or a sucker’s bet?

Some savvy investors think it’s the former. Recent history says they’re right.

Paolo Batori, global head of sovereign credit strategy at Morgan Stanley, told the Wall Street Journal that 10-year bond yields could drop in half, back to the 4% or 5% range, fairly quickly if the country can reduce its debt burden and if Greece is eventually included in the ECB’s government bond-buying program as early as July.

As recently as last September the 10-year bond was trading below 6%. While Greece doesn’t currently qualify for the ECB’s quantitative easing program, announced on January 22, which includes the purchase of euro-area sovereign bonds, it might come July. ECB President Mario Draghi gave a strong hint that that might happen.

Should that indeed come to pass, that would surely give Greek bond prices a huge lift.

Batori’s not alone. UBS says long-term Greek bonds offer good value, particularly if the probability of a Greek exit from the euro zone is lower than 5%, as UBS believes. Recent comments from new government ministers indicate they don’t want to leave the union, although it’s possible that other EU members might try to push Greece out, although that’s even less likely to happen.
Greylock Capital Management’s Hans Humes told Bloomberg television, “We are very enthusiastic about Greek debt.” The New York-based firm has invested in Greek debt since the country restructured its obligations in 2012.

It made a killing. In March of that year the yield on the Greek 10-year bond soared to more than 35%; it dropped to below 6% a little over a year later, meaning the price skyrocketed.

Pacific Investment Management Co. and hedge fund Alden Global Capital have also enlisted in the Greek bull camp.

Nobel Prize-winning economist Robert Shiller, the Yale University economist who predicted the U.S. subprime mortgage collapse, had the most interesting take on buying Greek debt.

“Investing in Greece right now just might not feel right,” he said. But “you can’t free yourself from the prison of the zeitgeist unless you become a smart beta person and start mechanically doing investments that don’t sound right.” The price of Greek stocks is “below anything I’ve seen in the U.S. and suggests a spectacular investment,” he said.

We have seen this before, and not just in Greece.

Back in July 2012, 10-year Spanish bond yields hit 7.5%, about 600 basis points more than comparable U.S. securities, which were yielding about 1.5%. Italian bonds were yielding about 6%.

Flash forward to today. Spanish yields are about 30 bps below comparable Treasuries, while Italian bonds are about 20 bps below Treasuries.

If you missed those opportunities, Greece may be giving you another chance.

I’m not saying you will sleep better at night or that it will be easy on your stomach. On Friday a German Finance Ministry spokesman said a “discussion about a haircut or a debt conference [with Greece] is outside of reality,” while the Greek government said it would not cooperate with its official creditors unless it gets debt relief.

This won’t be easy to resolve, but it’s hard to believe it won’t be eventually. Recent history has shown it will.

You may as well make some money on it.

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George Yacik Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.

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