{"id":15222,"date":"2017-05-09T22:25:41","date_gmt":"2017-05-09T19:25:41","guid":{"rendered":"http:\/\/bestinsurance.gr\/a1\/?p=15222"},"modified":"2017-05-09T22:25:41","modified_gmt":"2017-05-09T19:25:41","slug":"miss-epic-rally-greek-government-bonds","status":"publish","type":"post","link":"https:\/\/bestinsurance.gr\/a1\/archives\/15222","title":{"rendered":"Did you miss the epic rally in Greek government bonds?"},"content":{"rendered":"

Did you miss the epic rally in Greek government bonds?Lots of things have happened since the start of 2016. The Chinese government shifted its macro policy stance from tightening to easing to (recently) tightening again. India embarked on a bold and painful experiment with \u201cdemonetisation\u201d<\/a>. The South Korean president was impeached for corruption. There were some elections in America and the UK.<\/p>\n

But is all that excitement an acceptable excuse for portfolio managers who failed to buy the Greek government\u2019s 2042 bond back in February 2016 and missed the subsequent 59 per cent rally in price?<\/p>\n

\"\"<\/figure>\n

(Thanks to Tradeweb for pointing this out and also providing the data.)<\/p>\n

<\/div>\n

While some of the rally tracks the broader recovery in risky assets after the Chinese government opened the credit spigots, almost half of those gains occurred in just the past few months:<\/p>\n

\"\"<\/figure>\n

The big gains for bondholders aren\u2019t simply a product of reduced risk-aversion. If you squint long enough at the chart below you\u2019ll see the difference between the yield on German 10-year debt and Greek equivalents is still more than a percentage point wider<\/em> than it was in June, 2014:<\/p>\n

\"\"<\/figure>\n

This presents an interesting question: Could the rally in Greek sovereign debt have further to run?<\/strong><\/p>\n

The current mix of Greece\u2019s market interest rates, growth forecasts, and budget targets seem unsustainable<\/a>. For a country with monetary sovereignty, that implies falling yields and rising bond prices. For members of the euro area, it implies debt restructuring.<\/p>\n

Suppose this eventual debt restructuring allows Greece to stay in the euro area, excludes investors in Greek government bonds, and only affects Greece\u2019s obligations to its \u201cofficial sector\u201d creditors. (We know that\u2019s a lot of assumptions, but it\u2019s apparently what many people seem to assume must happen eventually.) That could potentially free up more resources for the government to service its bonds while investing in growth, markedly reducing credit risk.<\/p>\n

Spreads against German sovereign debt currently imply a cumulative probability of default greater than 40 per cent over the next decade. That estimate is based on the assumption that investors get paid nothing in the event of default. Partial recovery would imply significantly greater odds of default in the next ten years:<\/p>\n

\"\"<\/figure>\n

For perspective, the equivalent odds of default implied by the relative prices of Portuguese and German bonds is currently about one in four. That in turn is significantly higher<\/em> than the low point of 12 per cent at the start of the European Central Bank\u2019s bond-buying programme:<\/p>\n

\"\"<\/figure>\n

Portugal devotes a larger share of its economic output to debt service<\/a> than Greece does now \u2014 about 4.0 per cent of gross domestic product versus 3.3 per cent according to data from the International Monetary Fund. (One wrinkle is that some Portguese debt is funded by domestic creditors, while almost none of Greece\u2019s is.) Depending on the magnitude of any official debt restructuring, Greek obligations could therefore end up considerably less<\/em> risky than those issued by many other European countries. That in turn could imply a large decline in spreads and a continuation of the current bull market.<\/p>\n

As long as we\u2019re imagining a relatively benign outcome, imagine that the ECB finally stops treating Greece as a pariah and instead embraces it as much as it does all the other euro area countries with high indebtedness, embattled banks, miserable demographics, lacklustre productivity growth, relatively tight budgets, and dysfunctional politics. The combined effect of all this could be a world in which Greek long bond prices rally significantly more, although not nearly as much as they already have.<\/h3>\n

Of course, there is another possibility: European politicians fail to implement the institutional reforms necessary to enable Greece to return to growth in a timely manner. The Greek people, having endured a depression almost without precedent<\/a>, might finally lose patience and decide it would be better to leave the single currency, with all the risks and opportunities that entails, rather than commit themselves to an eternity of immiseration. Euro-denominated Greek sovereign bonds would fare poorly in this scenario.<\/p>\n

Source:link<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Did you miss the epic rally in Greek government bonds?Lots of things have happened since the start of 2016. The Chinese government shifted its macro policy stance from tightening to easing to (recently) tightening again. India embarked on a bold and painful experiment with \u201cdemonetisation\u201d. The South Korean president was impeached for corruption. There were<\/p>\n","protected":false},"author":1,"featured_media":15223,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[1],"tags":[],"class_list":["post-15222","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-1"],"jetpack_publicize_connections":[],"_links":{"self":[{"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/posts\/15222","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/comments?post=15222"}],"version-history":[{"count":1,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/posts\/15222\/revisions"}],"predecessor-version":[{"id":15224,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/posts\/15222\/revisions\/15224"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/media\/15223"}],"wp:attachment":[{"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/media?parent=15222"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/categories?post=15222"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bestinsurance.gr\/a1\/wp-json\/wp\/v2\/tags?post=15222"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}