Surging Greek Bond Yields Risk Distorting Election Threat

Beware of reading too much from the bond market when it comes to Greek politics.

Yields on 10-year government securities rose above 10 percent for the first time in 15 months this week, reflecting concerns that Greek Prime Minister Antonis Samaras’s New Democracy party will fail to close the gap with rival Syriza. Greeks cast their ballots on Jan. 25 with a potential conflict with international creditors at stake.

Yet that message from the market has been clouded by a collapse in liquidity and trading during a debt crisis that erupted in late 2009 and led to the biggest restructuring in history. Trading of Greek government bonds through the electronic secondary securities market, or HDAT, totaled 372 million euros in December, or about 2 percent of what it was five years earlier, Bank of Greece data show.

“The implication from that is not to read too much from movements in any one day,” David Schnautz, a New York-based fixed-income strategist at Commerzbank AG, said in a telephone interview from the bank’s London office yesterday.

Political Impasse

The difference between the bid and offer yields for Greek 10-year bonds, a measure of liquidity, was about 36 basis points yesterday, according to data compiled by Bloomberg. On German bunds, the euro area’s benchmark sovereign securities, the spread was 0.1 basis point.

Samaras was forced to name an election date under the constitution after he failed to win parliamentary backing for his candidate as president in three votes last month.

The political impasse and the prospect of Syriza and 40-year-old leader Alexis Tsipras taking the helm rekindled concern about Greece’s future as a euro member. While Syriza wants to keep the country in the single currency, it opposes the austerity attached to its bailout agreement.

Greek bonds have declined 15 percent in the past month, the only sovereign market to lose money for investors, according to Bloomberg World Bond Indexes. In the first half of 2014, they made 30 percent as Samaras won fresh international funding and the economy emerged from a six-year recession.

Pricing Risk

“Yields are rightly high, as they price in a risk,” Theodore Pelagidis, senior fellow at Brookings Institution and professor of economics at the University of Piraeus, said yesterday. “But if every actor thinks rationally, and given that the vast majority of the Greek people and the middle class that votes for Syriza want Greece to stay in the euro, Tsipras will be forced to do what voters want.”

In the run-up to the last election on June 17, 2012, Syriza and New Democracy were neck and neck in the polls. It was the second vote in six weeks and yields on 10-year Greek securities rose 10 percentage points to exceed 30 percent between the two ballots. Samaras ended up prevailing and forming a government.

Syriza is on course to get 31.6 percent of votes, compared with 28.6 percent for New Democracy, according to a survey by Alco, an Athens-based polling company, for To Pontiki newspaper published yesterday. Syriza’s lead narrowed from 3.3 percentage points in the previous survey, published Dec. 27. Both parties gained at the expense of smaller rivals.

Paying Debt

Greek 10-year bond yields climbed to as high as 10.8 percent yesterday, the most since September 2013. It was at 10.08 percent today.

Investor concern that Greece will miss debt payments is reflected in three-year yields that are more than three percentage points more than those on 10-year debt. Typically investors get more for holding longer-dated securities.

“The price levels portray that the market is very afraid of another round of private-sector involvement in debt restructuring or the debate about Greece potentially leaving the euro zone,” said Schnautz at Commerzbank.

Greek government bonds offer growing value for a high-stakes bet on the assumption that there’s talk of a euro exit “with no real bite,” Padhraic Garvey, a debt market strategist at ING Groep NV in London, said in a report this week.

Should Syriza win the vote and ultimately form a broader coalition government, a solution will be found facilitated by Germany as the country’s biggest source of funding in the euro region, said Pelagidis at Brookings Institution. If Syriza go it alone, the problems may begin, he said.

“All this will be possible only if Tsipras doesn’t secure a majority government,” said Pelagidis. “He will then be able to say that there was nothing else he could do because he didn’t have absolute majority in parliament, and that he got a grace period on debt repayment and lower debt costs.”

For News and Related Information: Greek Polls Show Samaras Running Out of Time to Close Syriza Gap Germany Open to Greek

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE