Money for Greece

Investors are virtually rushing to borrow money from the government in Athens. Greek government bonds are now yielding even less than Italian papers over several terms. There are reasons for this, says Sven Langenhan, Portfolio Director Fixed Income at Flossbach von Storch AG.

Rescue package, debt cut, default. Not so long ago, Greece's credit rating was not particularly good. Unnoticed by many, the country is making a comeback with investors. At least that is what the recent sharp drop in yields on Greek government bonds indicates.

The risk premiums on securities of other Euro countries are falling. At the moment, Greek government bonds are yielding lower than Italian paper for several maturities. Five-year Greek government bonds, for example, yield 0.50 percent, and corresponding Italian debt instruments 0.58 percent (as of January 10, 2020). Yields on ten-year maturities are now also almost equal (see chart).

And Italian government bonds - just think of the government debt ratio of 133 percent of GDP, low growth and political uncertainties - are not without risk. Many a person may be rubbing their eyes in disbelief at this point: Exactly ten years ago, the Greeks triggered a debt crisis in the eurozone and thoroughly spoiled the euro's ten-year anniversary. There was a debt cut that hit many private bond investors particularly hard at the time. For eight years afterwards, Hellas was financed by the euro partners and the IMF.

Last year, the government in Athens issued new bonds for the first time again. Although rating agencies classified the securities as "speculative" or "highly speculative", the issues, with a total value of nine billion euros, were several times oversubscribed.

Why do Greek bonds yield so low?

Italian government bonds, unlike Greek securities affected by a debt cut, have never defaulted before. The national debt is lower than in Greece, the credit ratings better than those of the Greeks. So why are yields on Greek securities lower?

The reasons can be many and varied. For example, the trading volume, and therefore the liquidity of Greek securities, is significantly lower than its Italian counterparts. Individual orders, for example from ETFs, can therefore have a greater market impact. The European Central Bank (ECB), on whose behalf the central banks of the countries concerned purchase government bonds, may also play an important role. Hedge funds could also be behind this development. Above all, however, it is probably the attempt by bond portfolio managers who (have to) invest in European bonds to somehow get some return into the portfolio in the current zero to negative interest rate environment. Whatever the cost - and despite all the risk involved.

For private investors, this example shows one thing above all. As interest rates in the eurozone have disappeared, so have the risk-compensating return opportunities for traditional bond investors who buy bonds to hold them until maturity. Only truly active investors who invest globally and take advantage of all the opportunities that the bond asset class continues to offer can achieve positive returns in real terms - i.e. after deducting inflation. And this with calculable risks.

Sven Langenhan
Sven Langenhan



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About Flossbach von Storch

Flossbach von Storch is one of Europe’s leading independent asset managers with more than EUR 70 billion in assets under management and over 300 employees. The company was founded in Cologne in 1998 by Dr Bert Flossbach and Kurt von Storch. Clients include fund investors, institutional investors, high-net-worth individuals, and families. 

All investment decisions are made on the basis of the company’s own world view, which is based on the critical analysis of economic and political contexts. As an owner-managed company, Flossbach von Storch is not bound by the guidelines of a bank or a corporation.