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Greek Bond Yield Pulls Back As Volatility Deepens

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Greek bond yields dropped on this morning’s market as investors grew a little less nervous about the country’s new leader. Yields on 10 year bonds from the Mediterranean country stood at 10.15 percent at 12:35 p.m. London time according to Bloomberg’s price reporting mechanism. The price of the country’s bonds has been incredibly volatile in recent days as more and more mystery surrounds the planned governmental program of the Alexis Tsipras.

Tsipras who leads a coalition government in which his party, Syriza, is by far the strongest force, has been sending mixed messages in recent days and the price of Greek bonds have bounced around as a result. A proclamation on Wednesday that he is ready to negotiate a debt deal sent bond markets reeling, but the pullback on Thursday isn’t enough to suggest anything like confidence.

Scrapping austerity

This morning’s rise in bond prices is part of a wider display of investor realignment in Greece. The country’s major banks saw a concurrent lift in their share prices on today’s market. Investors appear to be betting heavily on the likelihood of a debt deal that would see at least some portion of the debt left unpaid, though those bets seem to be leveling off.

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Mr. Tsirpas has declared that the country will not default on its debts, but the agreement he seeks to make on them is likely to represent a partial default on the country’s obligations. Back in 2011, Greece was given a reprieve on part of its debt as part of a joint effort by the IMF, the ECB and the EU to ensure the country could remain financially stable.

The relative calm that afflicted the market for Greek bonds leading into last Sunday’s election did not last for long. Once Mr. Tsipras had negotiated the formation of a government, proclamations of the end of International Monetary Fund enforced austerity began rolling out, and bond markets reeled once again. As bets once again cloud the Greek possibility space, only the most risk tolerant of investors dare to get involved.

European woe

There’s only so much the European Central Bank can do to lower bond yields and there’s some market forces that are bound to drive more dramatic changes. The entire European political and economic power structure is going to be shaken if the Greek government decides to take an extreme path out of its current crisis, no matter the actions of the central bank.

The ECB’s quantitative easing program would have a depressing effect on Greek yields, as it has through the Eurzone, if it were allowed to work its magic. A debt deal could, as in the Irish example, involve the refinancing of part of the loan in order to reduce the expense of repayments. Investors appeared to be betting on that solution heading into the elections, but the Greek government has made it clear that it has other priorities.

Bond investors betting on volatility have excellent opportunities in Greek bonds, but the risks are exceptionally high. If investors betting against the country are right, there should be plenty of opportunities for high risk bond traders across the continent.

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Paul Shea

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