Greek prime minister Alexis Tsipras told the International Monetary Fund (IMF) last week the country would not pay a planned €300m (£218.7m) loan instalment and instead proposed bundling several payments for a €1.5bn end-June transaction.
The tussle between Greece and its troika of creditors – the IMF, European Central Bank and European Commission – spooked markets with yields on German bunds reversing dramatically from 0.5 per cent to nearly 1 per cent for 10-year debt.
Phil Milburn, who runs the £712m Kames Strategic Bond fund, said he had parked 10 per cent of his portfolio in derivatives that would benefit his vehicle in the event of a bond sell-off.
“Until some of the fundamental problems are addressed, this issue is likely to oscillate in and out of the markets’ attention for the foreseeable future,” he said.
“I believe financial markets are placing too low a probability on an extreme outcome. Therefore I want to retain risk budget in the fund to be able to buy any dip in the prices of riskier assets should a sell-off occur.”
Vincent Juvyns, global market strategist at JPMorgan Asset Management, said investors needed to be careful given the uncertainty surrounding the situation.
“There is going to be high volatility as negotiations continue, but the fundamentals in Europe are okay and the market looks resilient,” he said.
Should Greece leave the eurozone, he added, it would present investors with a buying opportunity.
Charlie Deibel, head of rates strategy at Aviva Investors, agreed investors need to be prudent and recommended they find ways to “immunise” their bond holdings.
In light of doubts around Greece’s future, Aviva Investors have been reducing risk in the area of European bond exposure.
Mr Deibel said he had been buying what he called “immunised trades”, which should do well in both best-case and worst-case scenarios.
One such trade is holding 30-year Italian bonds while shorting equivalent 10-year debt. The manager said shorter-dated debt would likely sell off if Greece left the eurozone, meaning going short on debt with a limited lifespan should produce positive returns for the fund.
Tom Becket, chief investment officer for Psigma Investment Management, said a Greek exit would be a “cathartic event and ultimately when this problem is finally taken away, people will breathe a sigh of relief”.
The manager said he was bullish on Europe’s prospects in spite of the toing and froing with Greece, and was investing in stocks on the continent as well as some corporate bonds and distressed debt.
Fitch’s note of caution
While none of the managers would go so far as to confidently predict a Greek exit, credit-rating agency Fitch struck a sober tone with its note last week.
It said the move by Greece showed “how precarious a situation the country is in”, adding the risk of Greece missing its larger payment to the IMF at the end of the month “cannot be discounted”.
“The Greek government has not accepted the proposals presented by the institutions this week,” Fitch said.
“If the two sides do agree a deal, it will meet political opposition from elements of Syriza most hostile to the institutions’ proposals for pensions and public sector wages.”
Fitch added that if Greece did miss the end-June payment this would be “credit negative”, something that could create ripples throughout markets.