Bond Market Cannot Get Enough Of Greece

 |  Includes: FXA, FXB, FXC, FXE, FXF, FXY, NZDS, UDN, UUP
by: Dean Popplewell

"Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws." Plato is right, but with much restructuring, heartache and pain, Greece is back in the international bond market. They have arrived under much pomp and only two years after being at the epicenter of the euro-sovereign debt crisis.

Greece comes bearing gifts - the gift of higher yields. They have returned with a heavily subscribed €3b five-year offering with a yield just under +4.9%. It seems all the recent "haircutting" has been forgotten. Due to the current low rate environment, a yield return clocking in near +5% will always be in demand and this Greek issue is no exception. Investing in any asset involves risk and investors always want to be paid for taking a risk. This will be the country's first international bond issue in four years and, rightly so, it has been getting a lot of press. By this morning it had attracted over +€20b worth of interest from 550 investors.

The deal is seen as the "culmination of an impressive recovery and restructuring story." So that's it - Greece is able to fund itself after its wilderness "walkabout" and there is nothing investors should be worried about? One wishes it would be that easy. Greece still needs a leg up; it's not like Ireland and Portugal, who have also returned to the market this year. Greece remains heavily reliant on Troika funding to finance its "questionable" economy. In fact they are expecting a €5.8b check, assuming it's in the mail, to cover some of next month's bill redemptions.

It is indeed impressive that Greece has been able to tap the market on its own after a four-year absence. However, the country remains in bad shape and will require all the help it can get. Its debt-to-GDP is +175% and an extra +€3b will not be able to do very much. Chronic long-term and youth unemployment brings forth many other social, cultural and economic problems that require copious amounts of economic and financial resources. Perhaps investors are being shortsighted climbing over one another to get a piece of something that returns less than +5%? Perhaps more premiums are still required to fix any of Greece's ills?

It seems that this market has been blinded by Greek yields so much so that investors have discounted the fundamentals - you cannot blame the investor entirely, they have been dancing on a flat curve for years. Even the ECB's lack of action has indirectly made seeking higher yields somewhat a necessity. With euro policy makers babbling about using alternative tools in their chest (like QE) to combat low inflation, any return close to +5% is too good an opportunity to pass up - hence the global investors' fixation of higher yields. Beware; they should be coming with a hazard disclaimer!

Let's hope it's not déjà vu? The last time Greece tapped investors (January 2010) the market was very bullish on the country. The €20b book was also oversubscribed with investors again ignoring the fundamentals and only focusing on the returns. We all know what happened - three months later Greece went cap-in-hand to Europe as yields skyrocketed on default fears. Greece needs to convince the Troika team not to consider pulling out too early; Greece still requires funding. It's different with Ireland and Portugal; they can stand on their own unlike Greece. The country requires a crutch for a very long while, without one they do not have the necessary funding to stimulate their economy.

In hindsight, yes it's euphoric but we should not be worried about this deal - it's the second and third and so on that the market should be worried about.

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