By Sunny Oh
In a demonstration of the insatiable appetite for anything sporting a positive yield, the Greek government’s cost to borrow money for over a decade fell below 1% for the first time in its history on Wednesday.
Investors say crisis-ridden Greece’s dramatic turnaround in the eyes of bond investors demonstrates how negative yields across the eurozone and other developed markets have forced fund managers into the riskiest corners of debt capital markets, be it emerging markets or “junk” bonds issued by indebted corporations.
The 10-year Greek government bond yield /zigman2/quotes/214974209/realtime BX:TMBMKGR-10Y -0.27% plunged 5 basis points to 0.982% on Wednesday, Tradeweb data show. Bond prices move inversely to yields.
This reflects the “upside down world of the epic bond bubble we are experiencing,” said Peter Boockvar, chief investment officer of the Bleakley Advisory Group, in a note.
The country has been able to borrow at rates lower than the U.S. government, even though the Greek economy is in a much weaker state. Greek’s national debt is still around 180% of its annual economic output.
Only a few years ago, Greece defaulted on part of its debt and stood at the epicenter of the eurozone debt crisis. This forced the International Monetary Fund and other eurozone states to launch the biggest bailout in history, lending Greece more than 290 billion euros ($316 billion) of funds between 2010 to 2018.
The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -0.70% traded at 1.626% on Wednesday.
To be sure, Greece’s 10-year government bond yield may not be a true reflection of the cost of borrowing money, as its public debt management agency has only started to increase new issuance after the end of its bailout program in 2018. In return for the debt relief, Athens agreed to run a budget surplus of 3.5% of its gross domestic product until 2022.
Rates for the bonds of Greece and so-called peripheral eurozone countries, those who share the common euro currency but are viewed as debt-heavy growth laggards within the economic bloc, have steadily fallen in the past few years. The European Central Bank’s monthly bond purchases along with investors’ demand for fixed-income assets carrying positive yield have helped lift the values of bonds issued by peripheral countries including Spain, Portugal and Italy.
The Italian 10-year government bond yield /zigman2/quotes/211347230/realtime BX:TMBMKIT-10Y -5.09% trades at 0.93%, and the Spanish 10-year rate /zigman2/quotes/211347132/realtime BX:TMBMKES-10Y -6.58% stood at 0.26% at last check.
“I can’t say Greece is the poster child for overvalued bond markets, but it’s certainly on the same page,” said Jack McIntyre, portfolio manager at BrandyWine Global, in an interview.
The stabilization of Greece’s economy since the eurozone crisis has also helped support buying of its government paper. It is forecast to expand at around a 2% pace, according to the Organisation for Economic Co-operation and Development.
The Greece unemployment rate stood at 16.5% in Nov. 2019, matching levels last seen in 2011.
“Greece has done some good things, the fundamentals have improved. We owned them, and in hindsight, we got out too soon. We had no idea [the rally in Greek bonds] was going to happen,” said McIntyre.
Investors say there’s potential for Greek rates to rally further if its sovereign credit rating is elevated to investment-grade, making it eligible for purchase by the ECB. Currently, its bonds are rated “junk” by the major credit ratings agencies.
S&P Global Ratings will conduct a review of Greece in April, while Moody’s appraisal will take place in May. Fitch upgraded the country’s rating by one notch to BB in January.
The Global X MSCI Green exchange-traded fund /zigman2/quotes/208159440/composite GREK +4.22% , which tracks the performacne of stocks listed in Greece exchanges, is down 8.6% year-to-date. But on a broader 12-month basis, the ETF has gained close to 32%, exceeding the more than the S&P 500’s /zigman2/quotes/210599714/realtime SPX +1.23% 22% climb over the same period.