Greek bond bull-run may be overdone
* Bond yields hits lowest levels since restructuring
* Technical trading, funding gap likely to contain rally
* One-way hedge fund gamble still poses risks
By John Geddie
LONDON, Oct 18 (IFR) - Greek sovereign bond yields tumbled to their lowest levels since the country's debt restructuring this week, but with markets trading on technicals and potentially destabilising events up ahead, there is little cause for celebration yet.
Hedge funds that have taken hefty stakes in Greek government bonds now face a nerve-wracking couple of months as Greece's creditors debate how to provide further support to the fragile economy.
Greece's current bailout package was designed to see it to the end of 2014 but a funding shortfall has emerged for the second half of the year which the EU Commission puts at around EUR3.8bn and the IMF at EUR4.4bn.
"I think some people are getting ahead of themselves, and the big question is how sustainable are these recent moves at the current time given there still needs to be a solution to Greece's funding problems," said Sohail Malik, manager at ECM Asset Management's special situations fund.
Greece's Troika of lenders - the EC, ECB and IMF - have to come up with a watertight plan to plug that gap in December, after Greece's favoured plan of rolling over its bonds held by the ECB was rejected earlier this week.
Most credit analysts believe further restructuring or even a third bailout, still looms ahead.
10-year Greek bonds hit yields of 8.2% this week for a cash price of around 66% of par, having more than doubled in value since they were handed to investors as part of the private sector haircut to restructure the country's debt in March 2012.
US-based investment firm Japonica - which says it is one of the larger, if not the largest holders of GGBs - believes they will trade up to as much as 85% next year.
However, apart from hedge funds, there are reportedly very few real-money, institutional investors taking positions in Greece, and as such, recent movements in its bond yields may show short-term relative value trading, driven more by general risk sentiment than anything specific to Greece.
For example, while 10-year Greek bond yields ratcheted in from over 35% to 12% over the course of 2012, this year they have traded in a comparatively tight range, hitting highs of 12%-13% amid fears around Cyprus and an early end to the US quantitative easing, and bouncing off resistance levels of 8% at the tight end.
And despite nearly all other European government bonds rallying on the news that the US had avoided default and raised its debt ceiling on Wednesday, Greek bond yields actually rose to 8.3% during Thursday's session, coming off the 8.2% lows.
"There's likely to will be a lot of bumps in the road for Greece because the trade these hedge funds have put on is one-way and there are no natural, real-money buyers supporting it," said Malik.
"If these hedge funds suddenly look to take profits, or reduce their holdings because of some major event-risk, then the ensuing sell-off could be quite dramatic."
One bright spot is that the country is on course to report a primary budget surplus this year, before debt repayments, but its creditors have also spotted a fiscal gap in its 2014 draft budget.
Any additional austerity measures to rectify this discrepancy will not be welcomed in a country where household income has been reduced by around a third, and youth unemployment has spiked to 65%.
Reigning in Greek public debt is proving a tall task with it set to hit 175% of GDP this year.
Then there is the country's insolvent state-owned banking sector to contend with - another faltering sector that has attracted speculative hedge fund investment despite its dismal outlook.
Non-performing loans in the Greek banking sector rose from 16% at the end of 2011 to 24% at the end of 2012, and stand at 28% now, according to IMF Financial Stability Indicators. EUR66.32bn out of EUR237.52bn loans are behind by more than 90 days, and EUR34bn of these are not provisioned against - 156% of the capital in the Greek banking system. (Reporting by John Geddie, Additional reporting by Owen Sanderson, Editing by Helene Durand and Matthew Davies)
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