Tsipras proves bullish surprise as bonds to ETFs reveal no panic

Traders who got attached to bets that Greek financial markets will unravel are getting a lesson in politics.

Spurred by signs the new government is softening its stance on debt payments, Greece’s ASE Index has jumped 16 percent in two days, the most since 1990. The yield on 10-year bonds fell 1.43 percentage points to 9.52 percent on Tuesday and sits almost 35 percentage points below highs reached before the nation held the biggest-ever reorganization of sovereign debt in 2012. An exchange-traded fund tracking Greek equities has received more than $45 million in fresh cash this year.

The reversal shows the dangers of committing to bearish trades in Greece, where newly empowered leaders are showing signs of compromise after pledging to loosen austerity measures imposed two years ago. While the ASE has fallen 30 percent in five months, it’s posted seven separate rallies of 4 percent or more along the way, including an 11 percent surge on Tuesday.

“It’s difficult to predict anything,” said Veronika Pechlaner, an investment manager at Ashburton Ltd. in Jersey, the Channel Islands. “It’s all about politics. The real deadline will be when the bailout program ends, or possibly a bit later than that. The base case for most people is still that these negotiations will go reasonably well.”

Shares are proving resilient in a country where the economy is forecast to grow 1.9 percent this year, according to the median economist projection in a Bloomberg survey. In 2014, gross domestic product rebounded from the longest and steepest recession on record.

Volatility jumps

A plunge in bank shares sent the ASE to its lowest level since September 2012 last week after Syriza leader Alexis Tsipras’s pledge to seek a writedown of Greek debt helped him win the Jan. 25 vote. Since former Prime Minister Antonis Samaras announced presidential elections in December, intraday stock swings for the ASE have doubled from their one-year average, data compiled by Bloomberg show.

Nobel Prize-winning economist Robert Shiller said investors may have overreacted. The price of Greek stocks doesn’t reflect their earnings potential, he said last week.

While the nation’s bonds had the worst three-month returns of 34 sovereign securities tracked by Bloomberg’s World Bond Index, the selloff was much milder than in 2012, when Greece’s membership in the euro area was at stake. That year, private investors forgave more than 100 billion euros ($115 billion) of debt, opening the way for a new rescue package as the country’s debt reached 171 percent of its 2011 GDP.

Debt swap

Greek stocks and bonds rallied on Tuesday after Finance Minister Yanis Varoufakis outlined plans to swap some debt for new securities.

“The political rhetoric is more constructive than most feared,” said Espen Furnes, who helps oversee $85 billion at Storebrand Asset Management in Oslo. While international investors owning Greek stocks would face losses should Greece leave the euro, “these risks have somewhat abated,” he said.

Resolution of the debt issue is far from a done deal. Germany expects negotiations will drag on until April or May, when Greece approaches a cash crunch, a person familiar with the matter said. Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London, said the European Central Bank probably won’t accept Greece’s bond-swap proposal.

Tsipras was elected on pledges that would breach conditions of the bailout aid. Promises to raise wages and pensions, end public-sector firings and stop state asset sales are a concern for creditors, according to Ricardo Garcia-Schildknecht, an economist at UBS Group AG, and analyst Thomas Wacker.

Out of control

“They’re anxious that such unilateral actions could spiral the fiscal situation out of control,” they wrote in a note to clients.

Still, the bond trading on Tuesday didn’t indicate much concern. Investors tend to prefer the tea leaves of the debt markets for signals to the future, with many following the gap between government-debt yields of different maturities, dubbed the yield curve.

Three-month US Treasury bill rates have topped 10-year note yields eight times since 1960, with recessions following in six of those cases. In that period, there hasn’t been a recession that wasn’t preceded by an inverted curve, marked by short-term rates being higher than long-term yields.

Short bets

Investors are also abandoning bearish wagers. Short bets on the Global X FTSE Greece 20 ETF fell to 8.3 percent of shares outstanding, the lowest level since November and down from a high of 20 percent in December, Markit data show. Investors poured $43.8 million into the fund in January, the most since March. That represents about a third of the ETF’s market value, according to data compiled by Bloomberg.

The optimism spread throughout Europe’s periphery on Tuesday, where anti-austerity sentiment is also gathering strength. Spain’s IBEX 35 Index and Italy’s FTSE MIB Index climbed more than 2.5 percent, the most among 18 western-European markets after Greece. The Stoxx Europe 600 Index gained 0.8 percent, approaching a seven-year high.

“The post-election tail risks have receded after the government ditched radical debt-haircut requests,” said Thanassis Drogossis, head of equities at Athens-based Pantelakis Securities SA. “I am sure that Greece will come to an agreement in the next few months, although the road could be bumpy.” [Bloomberg]