Morgan Stanley says hold onto your Greek bonds as election looms

Greek government bonds with longer maturities are worth keeping through a period of volatility as snap elections approach next month, Morgan Stanley (MS:US) said.

A selloff in 10-year bonds pushed yields to the highest close in 15 months yesterday amid concern the vote will hand power to the opposition Syriza party, which is opposed to some of the demands of Greece’s international creditors. Valuations of the nation’s bonds now present an attractive risk-reward opportunity, London-based analysts Paolo Batori and Robert Tancsa wrote in a report dated yesterday.

“The macroeconomy is likely to be more resilient to a change in policy direction than the microeconomy,” the analysts wrote in the report. “This underpins our long-term constructive view on the bonds, but near-term risks remain substantial. Volatility is likely to remain high and the probability of a euro exit may rise further over the coming months.”

Greece’s 10-year yield closed at 9.59 percent yesterday, the highest since September 2013. The three-year note yield was at 13.34 percent, with the higher yields on shorter-maturity debt suggesting investors may be concerned they won’t be repaid in full. Greek securities were the worst-performing sovereign debt in the euro area this year and the only ones to post a loss, according to Bloomberg World Bond Indexes.

Greek Prime Minister Antonis Samaras triggered the snap election after he failed to get a majority of lawmakers to elect his candidate for head of state this week. With the vote likely to be on Jan. 25, polling data suggest neither Samaras’s New Democracy nor the main opposition Syriza party will win an outright majority, meaning coalition negotiations or even a repeat vote will be needed.