My Big Fat Greek Debt Investment … or is it Speculation?

I spoke with one of my brokers at a major U.S. financial institution after I just put in an order for Greek debt. I asked him “Blake, how many of your other clients are requesting Greek Bonds?” He laughed and said “Zero. It’s you.” So either I’m nuts, or I’m going to be shown to be brilliant. 

I preach about “investing” as opposed to “speculating” and I even wonder to myself, “Paul, you bought Greek debt…is that an investment or a speculative play?” Well, that is a good question, and I keep going back and forth on it. It is an investment in the sense that I am seeing cash flow, and pretty good cash flow as you can see below. And it is involved with a government, albeit one that is on the brink of bankruptcy.

It is speculative for the same reason: default/bankruptcy is always scary. It is something that no country wants to ever go through, but read further for what my thought process was. First off, here is what I did:  I bought 5 different bonds with the following yields:  

2 year yield: 27.9%
5 year yield: 19.27%
10 year yield: 15.44%
15 year yield: 14.09%
30 year yield: 11.31%

Average: 17.6%

For those familiar with government bonds, the immediate question should be “wait, why are the shorter yields so much higher than the longer yields?” Here in the U.S., the longer the term, the more risk there is of default and therefore the higher yield paid out. Well, yes, that’s correct, but look at what’s going on in Greece right now. They are at the tipping point of default. It’s literally a day-by-day look into where they are going to stand. The 30 year yield is almost 60% lower because the assessment is they will be out of this mess at some point in the next 30 years and will be more stabilized…or that’s the hope at least.  

So why did I buy? Well first and foremost, I only spent 0.5% of my portfolio on it. Secondly, the yield is very high. Third, I am banking on what the world has come to accept as part of the normal course of business: bailout. I am banking on Greece being bailed out because of the ripple effect through Europe that it will cause. If this was 5-7 years ago, I would avoid it most likely. But we live in the world of bailouts, so I am going to bet on it happening. I think the downside risk is much less than the upside risk.

Worst case is I lose all my money, which still isn’t very likely over the long haul (30+ year outlook), but the upside is:  If there is a bailout and the demand shoots up, the yield will fall, but it won’t change my yield on my invested dollars.  And as we all know, when yield goes down, value of the bond goes up! And even if the values drop and default happens, I am banking on the longer term bonds staying around a bit longer and generating me a higher yield and avoiding default.

Time will tell on this one… Either way, I won’t be losing sleep or getting overly excited as it is a small portion of my portfolio.

1 Comment
  • Wonga
    December 17, 2011

    I think you should go ahead.Risk is another name of success in my eyes.If you want very good output then you have to take a risk too.But if you do not wisd to take such risk factor then you should avoid this.