Greek bond yields rose on Friday as investors booked profits on the rally that preceded Greece’s return to debt markets, with even its sought-after new five-year bond succumbing to selling pressure.
Athens, which had been locked out of capital markets for four years and was bailed out to the tune of 240 billion euros ($333 billion) as its economy faltered, received bids seven times the amount in its first sale of a new bond since before its bailout in 2010.
The transaction had buoyed other euro zone government bond markets on Thursday, but the new bonds faced a difficult birth as trading started on Friday, with investors losing their stomach for riskier assets.
“The euphoria is fading after yesterday’s deal,» said Owen Callan, a senior analyst at Danske Bank.
“People are taking stock of the fact (that) while its great that Greece regained some sort of access, there is still a very long road to recovery for Greece.”
Yields on the new Greek bond traded above 5 percent on Friday, compared with the 4.95 percent level at which it was issued. It had traded at lower yield levels earlier in the day, but that prompted immediate profit taking from Thursday’s buyers. Yields rise as the value of the bond falls.
Although its economy looks to have turned a corner, Greece is still seen by many as a weak link within the euro zone.
The government holds only a two-seat majority in parliament, and early elections are a constant risk, with the anti
bailout Syriza party leading in opinion polls.
Many investors still fear social unrest as unemployment, though falling, remains more than twice the euro zone average
at almost 27 percent. On Thursday, a car bomb exploded outside the central bank.
Also, Greece’s debts are still 1.7 times its economic output. The International Monetary Fund said Greece was likely
to need more financing help from the euro zone in the next two year despite its market comeback.
“The government … is fragile, and if the economic recovery falters then this fragility could play out even further,» said
Thede Ruest, a portfolio manager at ING asset management.
Yields on older Greek bonds jumped, with the 10-year yield rising more than a third of a percentage point to 6.32
In the run-up to the sale, Greek 10-year yields had fallen to four-year lows below 6 percent.
“It’s quite obvious that many of the guys that bought the bond were not the buy-and-hold type. They were just fast
money,» one trader said.
At their peaks following a March 2012 restructuring that imposed losses on private debt holders, Greek bonds yielded
above 30 percent.
Other euro zone bond yields rose as well on Friday, while global stock markets tumbled. Given the bigger picture, some
market participants said the new Greek bonds were doing well to sell off less than their longer-dated peers.
“The general market tone is weaker today, but even with that, the new bonds are holding up,» said Andrew Salvoni at
Morgan Stanley, one of the bankers managing the syndicated sale.
Athens received 20 billion euros of orders for its 3 billion bond sale. Demand was equal to about two thirds of the size
of its entire bond market and the volume of more than 100 days of Greek bond trading on electronic platforms.
The surprisingly hefty demand led brokers to mark the new five-year bonds at around 4.8 percent yield before the deal priced on Thursday, expecting the bonds to rally considerably once secondary market trade began. Friday’s moves caught them on the wrong foot.
David Schnautz, a strategist at Commerzbank, said the vast orders for the new bonds were not a true reflection of demand, as investors were prone to inflate their orders to make sure they received a decent allocation.
“The … demand that the bond attracted yesterday is no longer there today,» said Lena Komileva, managing director at G+Economics. «It remains the case that Greece is a troubled borrower struggling to attract genuine investor interest.” Some analysts said the final pricing was too aggressive, which was part of the reason Greek bonds sold off on Friday.
“It priced at least 25 bps below initial expectations. They took advantage of the big order book and probably they revised the pricing too much,» said Alessandro Giansanti, senior rate strategist at ING.
“Some investors are (selling) thinking it came at levels that were too tight.”
The Greek finance ministry said on Thursday a third of the bonds were allocated to hedge funds, investors notorious for having short-term trading strategies, leading some in the market to question the wisdom of that high allocation, given such robust demand.