If Greek PSI Deal Was 'In The Bag', Greek Bonds Would Be Rallying, Not Dumping
As headline after headline suggest that the PSI deal is getting closer and the market appears to be pricing in that headline-driven excitement, we cast a very skeptical eye over the performance of Greek bonds today. Short-dated GGBs, the August 2012 issue for instance, would be expected to rally if the deal was close (or even anticipated by the market) but instead, this 8-month bond traded to new record low price (and obviously therefore record high yields of 421%) today with quite a significant drop from EUR31.5 to EUR30 on the day. Further out, the 5Y GGB is the cheapest-to-deliver and is trading at EUR18.75/23.25 (quite a spread), down more today, and still well below an approximate EUR32 take-out. While there may have been some unwinds in the cash-CDS basis today, it seems to us that the greek bond market is absolutely not expecting a PSI deal and therefore risk-on rallies on the back of this (a debt reduction that will still leave Greek debt unsustainable) seem overdone at best (unless the IMF can cajole the US Congress to untighten its wallet some more - and even then, its not the solution Greece needs).
1Y GGB prices continue to drop - even as the 'deal' is supposedly in the bag...
As the price term structure shows GGBs trading well below any NPV-based take-out level and even very short-dated debt now trading down considerably.