Bets on Greek bonds reached their highest level since 2014

Hedge funds have raised their bets against Greece’s sovereign debt as the nation heads to the polls this weekend amid growing concern over the possibility of post-election political paralysis.

The total value of Greek bonds taken up by investors in anticipation of a price drop — known as short selling — reached its highest level since 2014 this week, exceeding $500 million, according to S&P Global Market Intelligence. beginning of the year.

Greece’s debt has outperformed other European countries so far this year, and last month S&P upgraded the country’s outlook from stable to positive, putting it on the verge of regaining the investment-grade rating it lost in 2010.

“Greek government bonds have outperformed their eurozone counterparts for a while, so the structure of the shorts goes against the current one. [bullish] narrative in Greece,” said Antoine Bouvet, head of European interest rate strategy at ING.

“So far, the prospect of an election has not slowed bond performance, but we will see the results.”

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The spread between Greece’s yields and Germany’s 10-year debt, a key indicator of investors’ assessment of risk, narrowed to around 1.5 percentage points this month from more than 2.8 percentage points last October.

Loan to market value line chart (millions of dollars) showing hedge funds' bets on Greek government bonds

The benchmark 10-year Greek bond is trading at a yield of 4.04 percent, which is lower than the 4.3 percent yield of investment-grade Italy. Yields fall when prices rise.

Richard McGuire, Rabobank’s head of interest rate strategy, noted that there has only been one negative spread in the past decade; that was last summer when the inversion was short-lived.

“I understand why fast-money investors are positioning themselves for the possibility of a similar turnaround,” he said, adding that if the ruling party fails to form a government after the first round of voting, it would mean uncertainty in the markets.

Despite the sharp increase in short-selling volume, investors note that it is still a very small share of total Greek debt, which stands at around €400 billion. Most of it is not owned by investors, but by official bodies.

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During the Greek debt crisis a decade ago, short positions against the country’s bonds peaked at more than $15 billion.

After spending years as Europe’s problem child, Greece’s economic performance is now strong, with the gross domestic product expanding by 5.9 percent last year. The national debt as a percentage of GDP reached 206 percent during the epidemic, but it decreased to 171 percent last year.

Professor Costas Milas, a finance professor at the University of Liverpool, said hedge funds could increase their bets on Greek debt because of “nervousness and second thoughts” ahead of the election, but with yields lower than Italian debt, “investors are not panicking.” Today”.