As Greek Markets Tank, Morgan Stanley Spies Opportunity

The rest of the world may have shrugged at Greece’s election outcome Monday, but Greece’s assets are certainly feeling the pain. Is that a sign to stay well away, or a signal to chance your luck with some cut-price bargains?

Take a look at Greek government bonds, for example. On Wednesday, the 10-year yield was back above 10% having traded pre-election around 8.6%. Greek bonds maturing in 2019, issued last year at a yield of just under 5%, now yield over 13%. The two-year rose by 3 percentage points, a huge move in the bond markets, to nearly 17%. Prices fall as yields rise.

But Paolo Batori, global head of sovereign credit strategy at Morgan Stanley, and a long-term Greek bull, thinks now could be the time to pick up some Greek sovereigns on the cheap. In the short-term, he says there could be some volatility as the market digests the news of Syriza’s election win and it forming a coalition with the right-wing Greek Independence Party. This could cause Greek bonds to sell off, he thinks on average from 58 cents on the euro before the elections to around 53 cents.

But longer-term, he believes prices will go back up. He projects 10-year bond yields to more than halve to as low as 4% or 5% -- even within the coming months – if the country can alleviate its debt burden and if Greece is eventually included in the ECB’s government bond-buying program as early as July. It’s worth remembering that both of those things come with a mighty big “if”.

“We still think Greek bonds are an attractive trade,” said Mr. Batori. “Credit risk in Greece is likely to collapse due to the combination of soft [official sector debt restructuring] and QE.”

Morgan Stanley’s projection is based on there being some kind of soft restructuring of Greece’s official sector debt, which would most likely involve a maturity extension and an extended holiday on interest payment on its EU loans.

Mr. Batori is not the only Greek bull. In a note published Monday, economists at UBS said long-term Greek bonds offer good value considering they are 13% below their median price between March and September 2014 – particularly if investors, like UBS, estimate that the probability of a Greek euro exit is much lower than 5%.

Not everyone is convinced that Greek bonds are a good buy at this point, though. Jacques Cailloux, chief European economist at Nomura, said Greek bonds yields will definitely fall if the ECB starts to buy the country’s debt - “that is 100% sure”. But he signaled that arriving at that stage is easier said than done.

“What is the appetite for the government to negotiate? It may be the right call, but I would like more visibility first,” he said

“The question is the timing – at what point the market prices [QE for Greece] in with a greater degree of certainty?”