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July 17, 2019
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Greek state bonds overshadow Italy’s

Down and out less than a decade ago, Greece is this year’s top performing eurozone bond market, enjoying inflows from investors dismayed by shrinking yields elsewhere and elevated political risk in Italy, the bloc’s other high-yielding credit.

Nine years after Greece went bust and led creditors through a protracted debt restructuring, painful reforms are starting to bear fruit, with its debt ratio seen improving from this year.

This month, Greece’s five-year borrowing cost fell below that of Italy for the first time since 2008, remarkable given that Italy is an investment-grade credit, rated four notches above Greece at Baa3/BBB/BBB.

At B1/B+/BB-, Greece is classed as “speculative grade,” meaning it is ineligible for various global indexes that investors track.

While that has left Greece the preserve of hedge funds and emerging market investors, it seems now to have started its journey back into the mainstream.

“We have a preference for Greek debt over Italy,” said Nick Wall, portfolio manager at Merian Global Investors, who ventured into Greek bonds in May 2017 after French President Emmanuel Macron was elected with an agenda of eurozone integration.

But there are other factors. The dramatic global bond rally, based on expectations of fresh monetary stimulus, is driving down yields across the world, including in southern Europe where Spanish 10-year borrowing costs have tumbled below 0.4 percent.

Even with all its problems, Italy’s yields could soon slip below 2 percent.

“Everyone is desperate for a good carry story at the moment,” said Wall.

“If there is an opportunity to get some short-dated positive yield, people are going to take it.”

“Carry” refers to a trade in which investors who can borrow at low cost buy higher-yielding debt for a profit.

While Greece does not provide data on how much investment its bonds have received this year, its yields have fallen more than for any other eurozone government debt.

The premium investors demand to hold Greek risk over safe-haven Germany has meanwhile shrunk this year by 156 basis points.

[Reuters]

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