By Chiara Albanese
Global government bonds slid this week on speculation the next U.S. president will boost inflation, but one country has so far stayed out of the rout: Greece.
Greek 10-year bond yields fell to a five-month low on Friday, and are down more than 60 basis points this week, a sign risk associated with the asset is decreasing. That may continue as market turmoil since Donald Trump was elected improves the odds for substantial debt relief for the country, according to David Schnautz, a fixed income analyst at Commerzbank AG.
Greece’s government bonds have been rising amid optimism that a review of the nation’s bailout program will soon be completed, after doubts about the sustainability of its debt load have kept it locked out of global bond markets for more than two years. Yet this week’s outperformance in Greek debt comes after it missed a global bond rally in the aftermath of the U.K.’s June vote to exit the European Union, underscoring its tendency to act as an outlier.
“Buy Greece,” said Schnautz. “The ‘bailing-out parties’ may have very limited appetite to risk another re-run of Grexit risks flaring up over the coming months.”
Earlier this month, European Union officials said finance ministers could look at debt-relief measures at a Dec. 5 meeting and that the International Monetary Fund could get involved in the Greek bailout.
Greece’s 10-year bond yield fell 60 basis points this week to 7.16 percent as of 4:07 p.m. in London. By comparison, yields on U.S. and U.K. debt rose 37 basis points to 2.15 percent and 24 basis points to 1.37 percent respectively.
The divergence is particularly pronounced against bonds in neighboring Italy, where political risks are rising ahead of a December referendum on constitutional reform. Italy’s 10-year bond yield climbed 28 basis points this week and touched 2.06 percent on Friday, the highest level since July 2015.
Schnautz has proved prescient in a previous view on European periphery debt. In 2011, he recommended investors refrain from buying Cypriot government bonds, saying Cyprus was going to join Greece, Ireland and Portugal in facing a bailout. His call proved correct when Cyprus faced a financial storm from 2012.
Still, several others caution against the outlook for Greek bonds, which are illiquid to trade and highly sensitive to political headlines.
“Proper debt restructuring for Greece is unlikely to come soon,” said Frederik Ducrozet, a euro area economist at Pictet Wealth Management in Geneva, who is negative on the bonds.
UniCredit SpA analyst Luca Cazzulani also notes liquidity conditions in the Greek bond market are particularly sensitive to changes in risk, with Germany unlikely to offer significant concessions to Greece before its elections next year.
For all his optimism, Commerzbank’s Schnautz notes liquidity as a caveat to his view. “It is very difficult to get an idea on how ‘firm’ prices on Greek government bonds are, given that secondary market liquidity is so thin after a lack of supply since September 2014,” Schnautz said.