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Greek debt crisis creates potential for upside return in GIIPS

By Jordan Markham, Fixed Income Specialist
Jul 3, 2015

The debt crisis in Greece is sending bondholders out of Greece and seemingly right into U.S. treasury bonds, causing a 15 bps drop in the US 10 year treasury this week. Investors are moving into the safest bets; the Fed Reserve press release from its June monetary policy meeting indicated that it was going to slow the raising of the fed funds rate and keep it below normal levels even if employment and inflation are near mandate-consistent levels. This move should make the bond market more attractive as the risk of interest rates rising and diminishing bond value has lessened, which is most likely why we have seen a general yield increase month over month for the 10-year.

This shift seems to be leaving Greece's counterparts in GIIPS under bought. The four countries have significantly healthier current account balances, higher quality debt, and lower levels of Government debt than Greece, but Spain and Italy both have an RSI hovering around 30.

The majority of the debt crisis in Greece is a result of internal domestic issues with in the country, persistent misrepresentation of financial health, high unemployment, and a materially contracting GDP six out the last 10 years. Growth in these countries are likely to be hindered as result of perceived association to Greece. Movement from wideners to tighteners on CDS spreads has changed drastically for these countries, from a corporate issuances prospective for five-year CDS spreads, indicating a positive sentiment surrounding credit improvement in these countries. Italy, moving from zero tighteners to eight from last month to Wednesday; Spain from one to nine; Portugal from zero to three; Ireland, unchanged with one.

As seen in 2012, the risk of Greece exiting the Eurozone was seemingly priced into the Greek bond market, and betting on the Greek recovery paid off for some opportunistic investors. Undoubtedly the questions surrounding the outcome of Greece's debt crisis provides unknown risk; however, the potential for upside return in the GIIPS region should not be ruled out.

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