Bets against Greek bonds hit highest level since 2014

Hedge funds have been upping their bets against Greece’s government debt as the nation heads to the polls this weekend, as they become concerned about the possibility of political paralysis after the election.

The total value of Greece’s bonds borrowed by investors to wager on a fall in prices — known as shorting — hit its highest level since 2014 this week at over $500mn, according to data from S&P Global Market Intelligence — up from around $65mn at the start of the year.

Greek debt has performed better than that of other European countries so far this year, and last month S&P changed its outlook for the country from stable to positive, putting it on the cusp of regaining the investment grade rating it lost in 2010.

“Greek government bonds have outperformed their Eurozone peers for a while so the build in shorts goes against the prevailing [bullish] narrative in Greece,” said Antoine Bouvet, head of European rates strategy at ING.

“So far the prospect of the election has not slowed the performance of bonds but we’ll have to see after the results.” 

The gap or — spread — between the yields of Greece and Germany’s 10-year debt — a key gauge of investors’ risk assessment — has narrowed from more than 2.8 percentage points last October to around 1.5 percentage points this month.

The benchmark Greek 10-year bond is trading at a yield of 4.04 per cent, lower than the 4.3 per cent yield for Italy, which has investment grade status. Yields fall when prices rise.

Richard McGuire, head of rates strategy at Rabobank, noted that there has only been one previous occasion in the past decade when this spread has been negative; that was last summer, when the inversion was shortlived.

“I can see why fast money investors would be positioning themselves for the possibility of a similar reversal,” he said, adding that if the ruling party is unable to form a government after the first round of voting, that would bring uncertainty for markets.

Despite the sharp increase in shorting volumes, investors note that the overall scale is still a very small proportion of total Greek debt, which stands at around €400bn. Most of this is held by official bodies rather than investors.

During the Greek debt crisis a decade ago, short positions against the country’s bonds peaked at more than $15bn. 

After spending years as Europe’s problem child, Greece’s economic performance is now strong, with gross domestic product expanding 5.9 per cent last year. Government debt as a proportion of GDP hit 206 per cent during the pandemic but was down to 171 per cent last year.

Professor Costas Milas, a professor of finance at the University of Liverpool, said hedge funds may be upping wagers against Greek debt owing to “nervousness and second thoughts” ahead of the election but given yields are lower than Italian debt, “investors are not panicking today”.