JPMorgan loses conviction in Greek bonds as endgame approaches

The risk of Greece missing a debt payment is driving away even some of the most faithful advocates of its debt.

JPMorgan Chase & Co. was for most of this year a champion of Greece’s long-dated government bonds, even as a flare-up in the country’s debt crisis once again raised the prospect of default and euro exit.

On Friday, the U.S. bank recommended investors take 10 basis points of profit on a long position in the 3 percent Greek bond maturing in February 2042, as increasing pressure on the liquidity position of the government and banking sector meant some kind of resolution may be approaching. JPMorgan first recommended buying the bond on Jan. 28.

“Although the central scenario is for Greece to reach a compromise before missed payments and/or capital controls, our conviction is not high enough to justify aggressive risk- taking,” wrote Gianluca Salford and Aditya Chordia, rates strategists at JPMorgan in London, in a note to clients.

The recommendation comes as Greece and its creditors trade accusations over a lack of progress in the talks. Greece must make four payments totaling almost 1.6 billion euros ($1.78 billion) to the International Monetary Fund in June and its bailout package backed by the euro region expires at the end the month. The standoff over the terms attached to the international aid has triggered a liquidity squeeze and record deposit outflows, tipping the economy back into recession.

Greek government debt lost 4.53 percent in the year to date, the worst performance among markets tracked by Bloomberg World Bond Indexes. Financial markets in Athens were shut on Monday for the Orthodox Pentecost holiday. The yield on Greek 10-year bonds was at 11.45 percent in London, up from 11.25 percent on Friday. The yield on the 2042 Greek bonds was at 8.891 percent, up from 8.745 percent on Friday and a year-to- date low of 7.402 percent on Feb. 24.

Investors Sidelined

As talks drag raising the risk of Greece running out of money before a deal is struck, most analysts recommend that investors stay in the sidelines. Morgan Stanley, which in March turned neutral on Greek government debt from a formerly bullish stance, on Friday said it expects the securities’ prices to remain range-bound.

“To break out of the recent range on either side, we think that tangible evidence of an agreement is needed (i.e., the Greek parliament passing measures) or talks should break down completely,” strategist Robert Tancsa wrote in a note.

JPMorgan also suggested that investors take profit on a long position in Cypriot government bonds, due to potential for contagion from Greece to hit the securities.

“Given the pressure to hold Syriza together, a catalyst for an agreement in the form of missed payment and imposition of capital controls might be needed,” Salford wrote, referring to Greece’s governing political party.