What a Difference a Year Makes for Greece Left Stranded by Funds

Bloomberg 

by Max JuliusStefania Spezzati

2:01 AM EEST

April 15, 2015

As Greece once again flirts with default, the country’s bonds are trapped in no-man’s land, too risky for most mutual funds and not cheap enough for other investors.

A year ago, money managers championed Greece’s return to international markets from a four-year exile by lapping up an offer of five-year debt. Signs of economic recovery under a government supporting budget cuts drew investors like Invesco Asset Management Ltd. and BlackRock Inc. toward the bonds.

Many of them are now long gone, as a standoff between Greece’s new anti-austerity leadership and its creditors triggers fears over Greece leaving the euro, or “Grexit.” The vacuum has yet to be filled by hedge funds and those buying illiquid assets because returns aren’t near enough to distressed levels even as yields have tripled from a year ago.

“It was a trade that didn’t work and it was time to exit,” said Hartwig Kos, a fund manager at Baring Asset Management in London who bought the bonds last year. “I fear the Greek authorities are at risk of sleepwalking into a Grexit accident. Once they have resolved their differences, I will definitely re-enter the market.”

Rising Yields

Yields on Greece’s 10-year government bonds have risen about 340 basis points, or 3.4 percentage points, since Prime Minister Alexis Tsipras’s Syriza party came to power on Jan. 25 with an agenda to end what it sees as onerous commitments under Greece’s 240 billion-euro ($253 billion) bailout.

They were at 11.823 percent on Tuesday, albeit still well below a peak of 44.21 percent in 2012 when two elections in six weeks raised the specter of a Greek default.

Greylock Capital Management was among those hedge funds that added to its Greek debt holdings when bond prices fell soon after the January election.

Hans Humes, founder of the $870 million fund, said at the time that he would watch to see how bailout talks evolved before increasing its exposure. Greylock still holds Greek bonds, but has reduced its investment from a month ago because of increased risk of failure in the negotiations, he said on Tuesday.

Scarce Trading

Among the investors who still trade Greek debt is Adelante Asset Management Ltd., an emerging markets fund in London. Adelante has been trading the ranges in Greek government bonds, Chief Executive Officer Julian Adams said.

The fund’s strategy is to make brief forays into the market when prices become attractive. The 3.375 percent bond maturing in July 2017 looks enticing when it drops below 70 cents, he said. It was 67.8 cents on Tuesday.

“Sometimes you think you know where the prices are, and then you go to the market and they’re not there,” he said.

Even these transactions are few and far between while fresh supply is scarce. With the exception of short-term bills, Greece hasn’t tapped the market since August.

Trading of Greek government debt through the electronic secondary securities market, or HDAT, totaled 63 million euros last month, data from the Bank of Greece show. That compares with a peak of 136 billion euros in September 2004 and 1.7 billion euros in May 2014, the highest monthly volume last year.

About Turn

It’s a big shift from the demand that drove last April’s five-year bond to a yield of below 5 percent.

Funds from continental Europe and the U.K. led buyers at the time, according to the Greek Finance Ministry. Asset managers accounted for about 49 percent of the investor base, while pension and insurance funds totaled about 4 percent. The bond yielded 16.82 percent on Tuesday.

Invesco invested last year as the Greek economy showed signs it was on the path to recovery after emerging from a six-year recession that reduced gross domestic product by a quarter. It sold its last holding in September as it emerged that the country was likely headed toward another election.

Tsipras’s coalition is likely to come under pressure if Greece appears to be forced to sign up to another aid package when the current one expires at the end of June, said Nicholas Wall, co-manager of the Invesco European Bond Fund.

Until that happens, or a new governing coalition takes over that is in favor of more of the reforms specified by the euro region, Invesco is unlikely to reinvest in Greek bonds.

“Things may become more difficult for Greece when it will have to sign a new bailout program to meet further payments,” said Wall, whose fund had total assets of about 670 million euros as of Feb. 28, according to the company’s website.

The lack of market depth and volume may continue to deter some investment funds from returning, even under the most optimistic outcome for Greece’s current round of debt talks.

Natixis Asset Management, which hasn’t held Greek bonds since 2011, didn’t take part in last year’s sale.

“We certainly don’t find the liquidity to buy the size needed to make a difference to our funds,” Axel Botte, a strategist at Natixis, said last week. “I don’t think, whatever the scenario, we’ll dip a toe into the Greek bond market.”