Greece raised €3bn from the bond markets last week at a yield under 5 per cent. Brookes says the low yield on the debt underlines that the hunt for yield is bringing many fund managers to take on a lot of risk.
“It [the yield] is where UK gilts were in 2007, for me, how can Greece finance at 4.95 per cent? It is extraordinary because it is sub-investment grade but it is yielding almost 5 per cent,” he said.
“Is Greece calling the top of the market here? I don’t know. However, it shows the bond market is still reaching for yield and willing to reach into Greece.”
M&G’s Mike Riddell agrees that Greek government bonds remain unattractive due to the risk of default and questions over the country’s solvency.
The manager of four bond funds in the M&G stable, with total assets under management of £2.3bn, says he is staying from the asset class.
“Those who are buying into Greece’s new issue will no doubt flag Greece’s primary surplus as a major reason, but while the turnaround in the Greek economy is impressive, it’s worth noting that the IMF forecasts Greece’s gross public debt/GDP ratio to end 2015 north of 170 per cent, and that’s based off what again seem to be fairly heroic growth assumptions.”
“Liquidity is no substitute for solvency, and I don’t believe that Greece is solvent, which makes the new issue an easy one to avoid.”
“Some will cite Greece issuing 5 year bonds at less than a 5 per cent yield as marking the end of the eurozone debt crisis.”
“Others would argue that central bank behaviour in recent years has created colossal moral hazard, where the promise of seemingly infinite liquidity and the perception that almost nothing can be allowed to default has pushed investors to ignore risks and chase returns.”
Greece’s return to international capital markets, after its departure in 2010 as the eurozone crisis unfolded and questions were raised over its solvency, was dramatic.
It stunned markets by receiving more than €20bn of orders for its five year bonds, raising over €3bn for government coffers. Such high demand drove down yields below 5 per cent.
Following years of painful austerity and recession the country’s fundamentals have been improving rapidly.
Its stock market is up almost 60 per cent over one year, more than five times the rate of growth shown for UK and Northern European indices.
Performance of indices over 1yr
Source: FE Analytics
At the same time UK government bonds have seen their prices fall over the past year with returns falling 1.94 per cent compared to average returns in European sovereign debt rising 1.76 per cent as investors look for higher yielding instruments.
Performance of indices over 1 year
Source: FE Analytics
However, not all managers are pessimistic about the meaning of the successful bond issuance.
According to Greg Bennett, investment manager at Argonaut, it signals a further sign the Greek economy is improving and that confidence is returning to its markets.
Bennett also says the issuance of sovereign bonds is a further signal that the Greek economy was shedding its pariah status and becoming more popular with investors.
He thinks it will send a message to investors who’ve had so far stayed away from Greek equities that the country offers attractive valuations.
Argonaut has overweight exposure to Greek banks as these are well valued and best placed to absorb upturn in the country’s economy as its recovery gains momentum, Bennett says.
Click here to learn more about bonds, with the FE Trustnet guide to fixed interest.