Betting against Greek bonds has reached its highest level since 2014

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Hedge funds have increased their bets against Greece’s public debt as the nation heads to the polls this weekend, as they worry about the possibility of political paralysis after the election.

The total value of Greek bonds borrowed by investors to bet on falling prices – known as shorting – hit its highest level since 2014 this week at more than $500 million, according to data from S&P Global Market Intelligence – since around $65 million at the start of the year.

Greek debt has outperformed other European countries so far this year, and last month S&P changed its outlook for the country from stable to positive, putting it on cusp of recovery the investment grade rating which it lost in 2010.

“Greek government bonds have outperformed their Eurozone counterparts for a while, so short building goes against the prevailing [bullish] narrative in Greece,” said Antoine Bouvet, Head of European Rates Strategy at ING.

“So far the prospect of the elections hasn’t slowed the performance of bonds but we will have to see the results later”.

The gap or — spread — between Greece’s and Germany’s 10-year debt yields — a key indicator of investors’ risk assessment — has narrowed from more than 2.8 percentage points last October to around 1.5 percentage points this month .

The benchmark Greek 10-year bond is trading at a yield of 4.04%, lower than the 4.3% yield of Italy, which has investment grade status. Yields go down when prices go up.

Richard McGuire, head of rate strategy at Rabobank, noted that there has only been one previous occasion in the last decade where this spread has been negative; that was last summer, when the reversal was short-lived.

“I can see why quick-money investors would position themselves for the possibility of a similar reversal,” he said, adding that if the ruling party is unable to form a government after the first round of voting, that would lead to uncertainty for the markets.

Despite the sharp increase in short volumes, investors note that the overall scale is still a very small percentage of total Greek debt, which stands at around 400 billion euros. Most of this is held by official bodies rather than investors.

During the Greek debt crisis a decade ago, short positions against the country’s bonds peaked at over $15 billion.

After spending years as Europe’s problem child, Greece’s economic performance is now solid, with gross domestic product growing by 5.9% last year. Public debt as a proportion of GDP reached 206% during the pandemic, but fell to 171% last year.

Professor Costas Milas, a finance professor at the University of Liverpool, said hedge funds could increase their bets against Greek debt due to “jitters and second thoughts” ahead of the election, but given yields are lower than debt Italian, “Investors are not panicking Today”.