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Greek bonds' 47 pct return beats rest of world on brighter outlook

By Lucy Meakin

Greek bonds returned almost four times as much as any other government securities this year as the nation that sparked Europe’s sovereign debt crisis moved toward economic recovery after six years of contraction.

Greece’s 47 percent year-to-date return was the best of 34 sovereign debt markets tracked by Bloomberg World Bond Indexes. The second-best performer was Ireland, which exited its international bailout program on Dec. 15, with a 12 percent gain. Greece may record a primary surplus in 2014 that would qualify the country for additional debt relief under an accord with its creditors, Moody’s Investors Service said on Nov. 29.

“We are constructive on Greek government bonds,” Elga Bartsch, chief European economist at Morgan Stanley, said at a Dec. 2 briefing in London. Gross domestic product “should stabilize and then start to grow. They will get some additional help,” she said.

Greek assets are winning fans as fixed-income, currency and derivatives markets show the crisis that gripped the euro area from 2009 is finally fading. With European Central Bank President Mario Draghi sticking by his pledge to backstop the region, investors are returning to Greek securities, even after the nation’s financial trauma caused private bondholders to write off more than 100 billion euros ($138 billion) in 2012.

Japonica Partners & Co., a U.S. investment firm that offered to buy as much as 4 billion euros of Greek government bonds this year, expects its holdings to surge in value in 2014. It paid as little as 11.4 percent of face value for the securities it purchased and expects the debt to be valued at more than 85 percent by next year, founder Paul Kazarian said on an Oct. 3 conference call. Japonica said it’s now one of the largest holders of Greek government debt, without disclosing how much it acquired.

Further gains would also benefit Capital Research and Management Co., the Los Angeles-based fund manager, and Schroder Investment Management Ltd., which were among the biggest owners of the securities among asset managers and funds, according to data compiled by Bloomberg based on company filings as of September.

Greece’s government debt is too illiquid and the nation needs to boost its credibility before larger investors will buy the securities, according to Iain Stealey at J.P. Morgan Asset Management, which oversees about $1.5 trillion.

The country has received two international bailouts, and its ratio of debt to gross domestic product will be about 176 this year, according to European Commission forecasts. It swapped existing securities for new bonds maturing between 2023 and 2042 as part of the world’s biggest sovereign-debt restructuring in 2012.

“Ultimately there’s quite a small market, it’s below investment grade and there’s a debate at the moment whether it should be an emerging market,” Stealey, a money manager for J.P. Morgan Asset Management’s international fixed-income group in London, said in a Dec. 16 telephone interview. “We’d need to see some form of stability there and probably would need to see them coming back to the market with some kind of steady issuance schedule.”

Trading of Greek government debt increased to the most this year on Dec. 10, with daily volume on the HDAT electronic secondary securities market totaling 77 million euros, data from the Bank of Greece show. Trading was 40 million euros in the entire month of December 2012 and zero in October 2011, based on the data.

Greek 10-year yields dropped to 7.83 percent on Nov. 8, the lowest since June 2010. They were at 8.46 percent as of 5 p.m. London time on Dec. 27, from 11.9 percent at the end of last year. The price of the 2 percent security due February 2023 was at 67.76 percent of face value, up from 48.45.

The euro has climbed 4.4 percent against the dollar this year as the region’s debt crisis faded, rising versus all its 16 major counterparts apart from the Danish krone.

Greek securities are beating international peers for a second year after returning more than 100 percent in 2013, according to the Bloomberg World Bond Indexes. Last year’s rally was built on the decision of a coalition government to honor commitments made under terms of Greece’s international bailouts, diminishing the risk the country would exit the 17-nation euro.

Now the nation is showing signs of economic recovery. Its credit rating was raised two levels by Moody’s last month, which cited the country’s progress in fiscal consolidation. Fitch Ratings increased its score for Greece to B- in May, six steps below investment grade.

Credit-default swaps on Greece signal a Caa1 rating, two levels above Greece’s actual Caa3 grade, and seven below investment grade, according to Moody’s Analytics. The contracts have not actively resumed trading after being settled in March 2012 and they’re not among the top 1,000 entities tracked by the Depository Trust & Clearing Corp., which runs a central registry for the market.

The nation’s bonds signal a Ca rating, one level below Greece’s actual Caa3 grade.

Spyros Politis, chief executive officer of Athens-based TT- ELTA AEDAK, which manages the equivalent of $523 million, says he’s positive about owning Greek government debt, while viewing the securities “cautiously” until after elections for the European Parliament in May.

The main opposition Syriza party, which wants to renegotiate terms of Greece’s international loan deals, has 22 percent of support in terms of voter intentions for the election, according to a MRB poll for published Dec. 16.

The bonds’ performance this year reflect “a combination of political risk and economic achievement,” Politis said in a Dec. 19 telephone interview. “Progressively the trust of foreign investors, predominantly, has been cemented. The lack of any bad signs made the Greek bonds particularly attractive.”

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