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August 2018 marks the end of an era for Greece: After years of austerity, its emergency loan programme from the European Central Bank (ECB) has come to an end, which means that the Greek government can fund itself independently once again and issue more bonds to investors.
For those holding bond index funds, this shouldn’t bear any weighting on your portfolio. Greek goverment debt, and almost all Greek corporate debt, is still below investment grade, and most government bond or aggregate bond indices require at least investment grade credit ratings. Some actively-managed bond funds with wider investment remits are able to invest in Greek government and corporate bonds; it’s a case of getting under the bonnet of the funds that you hold and scouring their largest individual weightings.
10-year Greek government bonds are currently yielding 4.2%. As a point of comparison, 10-year UK government bonds (gilts) are yielding 1.4%*, and 10-year US Treasuries 2.85%*. So, on a relative basis, this is a better income payout. But does it compensate investors for the level of risk they could be taking on?
We posed this question to Kenny Watson and Aitken Ross, who co-manage the Elite Rated Liontrust Monthly Income Bond fund:
“The Greek economy is on a positive trend in terms of economic growth, but GDP (economic growth) remains well below what it was before the 2009 Greek Depression; Greek debt to GDP levels are the highest in the eurozone at close to 180%,” Kenny warned. “There is also significant political and social risk with Greece, as the effects of the austerity measures continue to bite.”
Aitken said investors should ask themselves whether a 4.2% yields provides enough compensation compared to other possible investments, rather than whether 4.2% is attractive full-stop.
“Financial services firms Legal and General and Aviva have subordinated – or higher-risk, unsecured – bonds outstanding with a similar level of interest rate risk, have much better credit ratings and are currently yielding close to 4%. So as an investor I believe I can find far greater value (from a risk-adjusted return perspective) elsewhere and as such I wouldn’t find Greek bonds an attractive proposition,” he reasoned.
We also spoke to Michael Scott, who runs the Elite Rated Schroder High Yield Opportunities fund. He agrees that economic growth in Greece remains tenuous. He added that unemployment rates are still high, and that limited policy flexibility means Greece’s hands are somewhat tied when it comes to helping its own economy through fiscal spending.
“Greek bonds currently look unappealing compared to, for instance, European high-yield corporate bonds. They even look unappealing compared to certain emerging market government bonds – which have sold off tremendously over the past few months, and yet have much better debt sustainability metrics when compared to Greece. In other words, they are less likely to suffer an excessive build-up of debt.”
A spokesperson from Royal London’s fixed interest team – which works on the likes of the Elite Rated Royal London Corporate Bond fund – explained that Greece’s debt sustainability has nevertheless improved (albeit from a low starting point) and that the cost of borrowing on 10-year government bonds has fallen from 8% to 4.2% since August 2016.
“Does this make Greece an attractive investment? I think it is fair to say that the risks have diminished, however so too has the value on offer,” he said. “Maybe there is still some value, but I think we would argue that there was significantly more when Greek government bonds traded at substantial discounts.”
*Source: Bloomberg, 28 August 2018