Investors Are Switching From Portuguese to Riskier Greek Debt for Better Returns

Updated on
  • Best of Portuguese bond rally may be over: Old Mutual’s Wall
  • More to play for in other high-yielders: BlueBay’s Dowding

Comercio Plaza in Lisbon.

Photographer: Mario Proenca/Bloomberg

Portugal’s credit-rating boost and the ensuing bond rally have prompted fund managers from BlueBay Asset Management and Old Mutual Global Investors to look at riskier Greek debt for better returns.

For BlueBay’s Mark Dowding, Portugal is “not a very high-yielding high-yielder any more”, with two-year government bonds yielding below zero. The Sept. 15 upgrade by S&P Global Ratings saw the country shed its junk-bond status for the first time in more than five years, tightening the 10-year yield spread over German bunds to the narrowest in 20 months.

Portugal’s debt is still rated below investment grade by Fitch Ratings and Moody’s Investors Service but both have a positive outlook on the nation. While an upgrade from one of these two agencies in the next 12 months is likely, Dowding said the “easy money” may be over.

“Most of the money has been made in Portugal and there is more to play for in other high yielders,” said Dowding, whose company manages $51.7 billion in assets. “We have funds where we can invest in high yield but there we have favored Cyprus and Greece over Portugal.”

Until recently Portugal was one of Old Mutual’s best trades. The firm, which manages 36.6 billion pounds ($49.6 billion), reduced its exposure given the “incredible” rally spanning the past few quarters, according to portfolio manager Nicholas Wall. While it missed the boost from S&P’s upgrade, Wall said he isn’t looking to get back in just yet.

“We think we’ve got the best of the rally already, we think the Portugal story is very well flagged now,” London-based Wall said. A potential ratings upgrade by another agency “should be more or less in the price. At these spreads and given we like other names out there like Greece and Cyprus, we won’t chase it now.”

The yield on 10-year Portugal bonds was at 2.42 percent on Friday, having steadily declined from a one-year high of 4.33 percent in March. The spread to German bunds narrowed to 196 basis points, the lowest since January 2016. While two-year Portuguese bond yields are at minus 0.02 percent, the equivalent Greek tenor offers 2.91 percent.

While questions remain on whether Greece will be able to stand on its own feet when its bailout program ends next year, the nation successfully attracted investors to a 3 billion euro bond offering in July, its first step into bond markets since 2014. Greece also saw a credit-rating upgrade from Fitch in August that made it possible for some of BlueBay’s funds to own Greek bonds, Dowding said.

Holders of Greek government bonds have seen a return of almost 17 percent so far in 2017, the highest in Europe, according to Bloomberg’s sovereign-bond indexes. That’s compared to 11 percent from Portuguese debt.

With borrowing costs for Portugal falling, markets will keep an eye on whether the nation will issue more debt. Its bonds have benefited from the European Central Bank’s bond-purchase program, which is expected to be reduced next year.

“Some people in the market who were chasing the Portugal story may not be long-term holders,” Wall said, adding that they’d “get involved” again in Portugal if there were a sell-off.

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