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Déjà Vu All Over Again!

25 July 2017 by Mark Holman

Today sees the return of the Hellenic Republic of Greece to international bond markets, after a three year exile. Just like their previous issue, the new deal will be a 5 year € denominated benchmark bond and once again they will be trying to issue below a 5% yield, as they successfully did back in April 2014 when they managed to issue just over €4 billion with a coupon of 4.75%. Indications are that this new deal will also launch with a new issue yield of around 4.75%. The lead managers and the Greek treasury officials should be applauded for taking the opportunity to tap the markets successfully, as being able to fund independently of external aid is an absolute priority for recovering nations. Greece has been quietly going about its own business this year with the latest bailout packages running relatively smoothly without too much negative press attention while the economy has benefitted from an overall pick up in Eurozone economic activity.

The old 5 year benchmark, which now has just 2 years before its expected maturity date, has seen an impressive performance this year, rallying to a recent high of just over 102, which equates to a yield of around 3.5%. However, if we wind the clock back to February this year, the bond was trading with a price close to 90 which equated to a yield of over 10%. In fact a look at the history of the 2014 issue tells us that it has barely spent much time trading over the new issue price, and back in July 2015 it touched a low price of 40; so worth a reminder that investing in Greek bonds is not for the faint hearted.

Back in 2014 when the previous issue was launched we highlighted in our blog “Greece at 4.95%?” that we really did not see the risk vs reward in owning the Greek sovereign at yields below 5%, and we hold exactly the same view today. While in the short term the conditions for owning Greek bonds may be reasonably stable, we cannot get away from the fact that they are entirely dependent on external assistance as the standalone credit metrics of the sovereign are just not investable from a fixed income perspective. The very nature of the assistance means that from time to time there will be contentious discussions between the providers of the aid (the EU, ECB and the IMF) that will deliberate on debt relief and haircuts; words which are not consistent with stable fixed income investing. There is also a level of brinksmanship between these parties and the sovereign that adds an additional layer of unwanted volatility for fixed income investors.

So in short, while we are reasonably convinced that the deal will go well today and should, for a period of time, trade at or above par, we also see a real potential for significant downside volatility as Greece continues to battle with its creditors over the coming years.

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