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Fidelity joins Prudential as biggest funds go Greek

By Eshe Nelson

The world’s largest investors are putting their trust in Greece’s government bond market as record-low yields across Europe compel them to invest in the country that sparked the region’s sovereign debt crisis.

Prudential Financial Inc. owns Greek bonds maturing in five years or less and yen-denominated securities to capture the nation’s higher yields. Jupiter Asset Management Ltd. has been increasing its holdings since October and Fidelity Worldwide Investment said it has been steadily building a larger position over the past six months. Those investors, whose assets exceed $1.4 trillion, join the ranks of Invesco Ltd., BlackRock Inc. and Legal & General Investment Management owning Greek debt.

“All the different euro-zone countries have different challenges and those facing Greece are among, if not the most, serious,” Robert Tipp, the Newark, New-Jersey based chief investment strategist at Prudential’s fixed-income unit, said in a telephone interview on June 12. “But there are a couple of things that Greece has in its favor in terms of the bond market. The relative value is attractive and the likely long-term course of these bonds is favorable.”

Greece returned to international markets after four years in April, selling 3 billion euros ($4.1 billion) of five-year securities and attracting bids in excess of 20 billion euros for the notes. Since then, yields on euro-area bonds have plummeted to record lows as the European Central Bank unveiled a package of stimulus measures to boost the region’s economy and combat the threat of deflation.

Risk-reward

Prudential, which oversees more than $1 trillion in assets, held about 9 million euros of the 2019 notes as of April, according to data compiled by Bloomberg.

It recently shifted its position in Greek bonds to shorter- maturity debt, according to Tipp. “The better risk-reward in Greek issues” are in notes due in five years and less, and to a larger extent in the yen-denominated bonds, he said.

The rate on the securities maturing in April 2019 has dropped 71 basis points, or 0.71 percentage point, since they were issued to 4.24 percent at the close in London yesterday. The price of the 4.75 percent bond maturing in April 2019 climbed to 102.16 percent of face value. Investors get an extra 381 basis points of yield for holding them instead of similar- maturity German debt, after the spread narrowed to 355 basis points on June 10.

ECB action

While it has so far shunned Federal Reserve-style asset purchases know as quantitative easing, the ECB has become the first major central bank to charge fees on deposits in a package of measures unveiled on June 5.
The average yield to maturity on euro-area government bonds fell to 1.3392 percent on June 9, the least on record, and was at 1.3576 percent on June 16, according to the Bank of America Merrill Lynch Euro Government Index.

Greek benchmark 10-year bond yields were at 5.98 percent yesterday. The rate was as high at 44.2 percent in March 2012 as the nation found itself shut out of markets and in need of a bailout and writedowns on existing securities to remain solvent.

Rehabilitation, recovery

Ariel Bezalel, the London-based manager of the 2.1 billion- pound ($3.6 billion) Jupiter Strategic Bond Fund, said he participated in the five-year sale and recent auctions of three- and six-month Treasury bills. Jupiter’s holdings range across maturities and include yen-denominated bonds, which are due in three years or less and offer a higher yield than the euro- denominated equivalents, he said.

“The success of the government’s new bond issue in April was a signal of confidence in the country’s rehabilitation and economic recovery,” Bezalel said in e-mailed comments on June 13. “Further actions by the ECB such as outright quantitative easing, although not our base case, could be a driver of significant tightening in Greek government bond yields.”

The Greek Finance Ministry is preparing an issue of new three- or seven-year bonds worth 3 billion euros to 5 billion euros this summer, Imerisia reported yesterday. That would allow the nation to tap into the lower borrowing costs.

‘Quite remarkable’

“It’s one thing having Ireland and Portugal go back to capital markets but having Greece back is quite remarkable,” said Padhraic Garvey, global head of rates strategy at ING Groep NV in London. “There certainly are buyers out there for Greek paper. They’re pushing against an open door because people want to get a bit of yield and Greece offers that.”

Even after Greece required the biggest-ever debt restructuring in 2012, when investors accepted losses of more than 100 billion euros, the economy is still contracting, unemployment is the highest in Europe and public debt exceeds 170 percent of gross domestic product.

The country is being supported by a 240 billion-euro bailout program from the euro area member states, the ECB and the International Monetary Fund.

“Recent performance has been very strong,” Tristan Cooper, a sovereign analyst in London at Fidelity, which oversees the equivalent of $282 billion in assets, wrote in an internal note on June 10. “Public and private debt is still large in Greece, but with the ECB commitment we do not view this as a significant headwind, indeed Greece may yet benefit from another round of debt relief later this year.”

Earning carry

Fidelity increased its holdings of Greek debt this year, according to Amie Stow, a fixed-income product specialist at the money manager.

Greek bonds returned 30 percent this year through June 16, the most in the euro region, according to Bloomberg World Bond Indexes. Portuguese securities gained 16 percent, while Germany’s earned 4.2 percent.

The strength of investors’ conviction in Greece is by no means certain as 10-year bond prices declined in May for the first time in four months amid concern the governing coalition was losing support, potentially undermining its ability to implement austerity measures.

Carmignac Gestion SA, which oversees 49.9 billion euros in assets, bought five-year notes at a yield of 4.75 percent, said Sandra Crowl, a member of its investment committee. Carmignac hasn’t bought any more since then as prices are too high given the political risks, Crowl said on June 11 in London.

“The political situation in Greece is also a concern,” she said. “We’ve stepped away from the market for the moment. There are some limitations to the extent you want to extend either credit or duration risk and at this point in time we’re happy just to hold the Greek bonds we have earning the carry.” [Bloomberg]

 

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