Traders Believe the Worst in Europe Debt Crisis Is Over

Sep.20.10 | About: iShares MSCI (EZU)

By Maulik Mody

Bloomberg reported Sunday that according to Germany’s biggest bond dealers, the worst is over for the eurozone’s most indebted nations. The yield on the 5- and 10-Yr Greece Bonds, which is currently close to 11.5%, is expected to fall to within 2.2% of the yields on the German Bunds in the next two years. Big firms like HSBC and Goldman Sachs advise buying Greece securities, especially the 30-Yr Bond which is trading close to half its par value. Greek securities are favored since they are trading at record low levels and have the most upside.

Survey of the banks that serve as the primary dealers at the German government bond auctions showed that the Greek 10-Yr spread over German Bund will drop to 6.4% by the end of next year, compared to 9.1% now. The survey showed that the narrowing of spreads this year will be narrow for bonds of Greece, Ireland, Portugal and Spain. The cost of insuring against default of the peripheral bonds are near an all time high, but are expected to fall by the end of next year.

To me, there might be substantial risk in investing in Greek securities. Less than two weeks back, JP Morgan had predicted that Greece will have to roll over its bailout package by three to six years in order to avoid default. Irish banks are also feared to need more government aid in order for them not to collapse. The monstrous levels of debt on the Greek government and the austerity measures adopted in the region will make it difficult for the eurozone to bounce back in two years from now.

Disclosure: None