Greek bonds rally but volume remains razor-edge thin

The biggest fund managers know that trading volume still is too low for them to buy or sell without buffeting prices. The quotes by banks, showing a 48 per cent return in the third quarter, reflect perceptions of political deals over Greece’s debt more than the nation’s ability to avoid default by implementing the economic measures as part of its bailout.

“Greece is important to us in as much as it is a proverbial canary in a European bond-market coal mine,” said Mark Dowding, partner and money manager at BlueBay Assset Management in London, which oversees $US62 billion. “We don’t like Greece’s track record on reforms, and have no plan to buy its bonds at this point.”

After months of high drama and a near meltdown of Greece’s financial system, the euro region’s most indebted nation managed to agree with its European creditors to secure a third rescue, to the tune of €86 billion. Prime Minister Alexis Tsipras is now seeking to quell a party rebellion against the conditions tied to the aid package by stepping down and holding an election as early as next month. It will be Greece’s second this year.

The return on Greek bonds this quarter through August 19 followed a 26 per cent loss in the first six months, according to Bloomberg World Bond Indexes. It brought the year-to-date return to 9.5 per cent, compared with 2.6 per cent from Italy’s bonds and 0.7 per cent from Germany’s.

Those few fund managers who were able to take the risk may have reaped the gain. Michael Krautzberger, head of euro fixed income at BlackRock International, said in July that some of the company’s total-return accounts bought a “tiny” amount of Greek bonds. BlackRock didn’t respond to an emailed question this week on whether it still holds them.

The flow of news – approval by the German Parliament for the new bailout and then Greece’s payment on time to the European Central Bank on Thursday – have not only boosted Greece’s debt. It buoyed government bonds of Italy and Spain, whose finances are among the more vulnerable among euro nations to a slowdown or rising political tensions.

Yet on Thursday, news of another impending election showed how sensitive the market is. Greek bonds extended declines and Spanish and Italian debt erased earlier gains. The yield in 10-year Greek government securities rose 20 basis points to 9.55 per cent, the highest in a week.

“Things are definitely looking better in the short term,” said Cosimo Marasciulo, head of government bonds at Pioneer Investments, which oversees $US242 billion. “But there are still some big hurdles to get over.”

Take state asset sales. In 2011, under Greece’s first bailout plan, €50 billion was to have been raised by 2015 through privatisation of public companies and real estate. Only €7.7 billion in sales have been agreed so far, according to data from Hellenic Republic Asset Development Fund.

Then there’s the overall debt burden, which Tsipras’s government and International Monetary Fund officials have said is unsustainable. With an economic slump crippling tax revenue, the debt-to-gross domestic product ratio could rise toward 200 per cent, according to an IMF forecast in July. By comparison, most advanced economies are well under 100 per cent.

“The country is insolvent,” said John Anderson, a money manager at Smith & Williamson, an investment company with the equivalent of $US25 billion of assets. “Investment in Greek bonds is a political play, not a financial one.”

source:smh.com.au