Money Managers See Uphill Road for Greek Bond Purchases by ECB

Profits may be more muted after initial rally

Greek Cabinet Ministers Attend Swearing In Ceremony

Euclid Tsakalotos, Greece's finance minister, arrives at the presidential palace for a swearing in ceremony of new cabinet ministers in Athens, Greece, on Wednesday, Sept. 23, 2015.

Kostas Tsironis/Bloomberg

Greek bond holders who enjoyed some profit following the quick election resolution may see more muted gains from here as the road to sustained market recovery remains bumpy, fund managers say.

The process of including Greek government bonds in the ECB’s quantitative easing program will take time as several hurdles stand in the way, while the new government may not be able to implement all the measures agreed, they say. ECB President Mario Draghi said in a testimony to European lawmakers on Wednesday that Greece must “own” its aid program for the central bank to consider the nation’s bonds.

Here’s what money managers say on the outlook for Greek bonds:

Invesco

Invesco remains constructive on Greek bonds, and has a small exposure, as there are some positive takeaways from the Greek election result, Nicholas Wall, co-manager of Invesco European Bond Fund said in a Sept. 22 interview.

It was a large win for Greek Prime Minister Alexis Tsipras, and the pro-bailout nature of the opposition should lead to a calmer Greek political environment.

Greek bonds are unlikely to be eligible for the ECB’s QE purchase program until December at the earliest, and the path to inclusion is not easy, according to Wall.

It partly depends on the ECB reinstating the waiver on collateral ratings, which in turn will depend on Greece showing credible compliance with its bailout program, he said. Hence, the waiver is unlikely to be reinstated before the first review, which starts in October, is completed. In addition, the IMF’s role in the Greek aid program remains unclear.

If Greece’s growth disappoints, there may be calls for further austerity, and investors are likely to continue to demand a higher risk premium when buying Greek bonds than they did in 2014, according to Wall.

Fidelity

Fidelity is reluctant to add to its Greek bond holdings before the emergence of more clarity on banks’ recapitalization needs. It’s also waiting for the economy to send some positive signals, sovereign credit analyst Dierk Brandenburg said in a Sept. 22 interview.

Fidelity’s view on Greek bonds has remained mostly unchanged over the summer, and in the run-up to the elections. The ECB is unlikely to include Greek bonds in its QE program any time soon as a lot of conditions need to be fulfilled before this can happen, Brandenburg said.

Tsipras has a stronger mandate now on one hand to implement reforms, while on the other hand, he may ask for more concession on debt relief, Brandenburg added.

Pioneer Investments

There’s “no chance” that Greece will be upgraded to investment grade in the near term even if it passes the first bailout review, as regaining an investment-grade rating is likely to take years, according to Tanguy Le Saout, head of Europe fixed income at Pioneer Investments.

Pioneer is not investing in Greece, given its sub-investment grade rating, he said in a Sept. 22 interview.

Any further rally in Greek government bonds will depend on the progress made in implementing the third bailout program, which may have slipped behind schedule due to the Greek elections, according to Le Saout.

Natixis Asset Management

Natixis AM is avoiding Greece due to inadequate liquidity conditions and any investment opportunity looks “quite remote,” strategist Axel Botte said in a Sept. 23 interview.

The good news from Syriza’s election victory is that the party has been stripped of its most leftist wing, and Greece’s bailout deal appears secure, he said.

The ECB is likely to include Greek government bonds in its QE program after the bailout agreement is formally signed, probably before year-end. However, it may not make a difference for Greece’s financing plans as it remains shut out of markets, Botte added.

Greylock

Greylock will look to add to its Greek asset holdings, as the implementation of measures agreed with creditors looks likely now, with Tsipras having a political mandate to do it, Diego Ferro, co-chief investment officer, said in an interview on Sept. 20.

Investors will follow in detail what happens with the implementation of Greece’s agreement with creditors, and what happens with the country’s banks. Both the Greek bond and equity markets may remain volatile, but will tend to perform well, he said.

Greylock has exposure to Greek bonds and some equities, and has taken advantage of recent weakness in the Greek market to add on to positions, Ferro said.

 

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