Greek Vote Spells Investor Opportunity

Alexis Tsipras’ Greek election win could spell further gains for the country’s high-yielding government bonds

The Wall Street Journal

By RICHARD BARLEY

Sept. 21, 2015 9:29 a.m. ET

Alexis Tsipras’ political gamble in calling new elections in Greece has paid off, returning his Syriza party to government. Buying Greek bonds also represents a gamble, but a potentially attractive one.

Mr. Tsipras’ support for the eurozone’s Greek bailout program remains questionable. But one message from Sunday’s elections is that anti-euro parties polled only 15% of the vote, Royal Bank of Scotland notes. The Popular Unity party, formed by former Syriza hard-liners opposed to the bailout, failed to make it into parliament. Low turnout of 55% may signal voter disillusionment with politics in general, potentially damping this message. Even so, Syriza’s essential contradiction of rejecting European bailouts while remaining within the euro appears to have been settled in the single currency’s favor, for now.

There are plenty of risks around implementation of Greece’s third bailout. But that is reflected in a Greek bond yield curve that is still inverted, with two-year bonds yielding 9.9% and 10-year bonds around 8%. The short-dated debt could well offer opportunity, as the biggest risk to these bonds has long been the question of Greece’s euro membership.

In the best-case scenario, if Greece keeps its bailout program on track, the bonds could become eligible for purchase by the European Central Bank—and expectations are building that ECB buying may be ramped up from current levels. Quantitative easing may not do much for the Greek economy, but would undoubtedly be a fillip for Greek bondholders.

Investors will need strong nerves, however. Liquidity is low and volatility high; bad news on the economy is likely to emerge.

But Greece actually offers diversification away from global risks linked to U.S. interest rates and China. It will be politics in Greece and the eurozone that determine whether a gamble on Greek bonds pays off or not.

Write to Richard Barley at richard.barley@wsj.com