Markets are Skeptical of Greece, but Short-End Attractive

Currency in Crisis

The markets await the speech by Greek Prime Minister Papandreou that will detail how he intends to address the fiscal woes that have created a bit of a crisis in Greece. The 2-year note yield has risen 175 bp over the past month, and 15 bp today to yield 3.05%, this is more than twice the German 2-year yield (1.23%) and half again as high as Ireland's 2-year yield (1.90%).

While Greece is under pressure from both the financial markets and European officials to take corrective action, we think a near-term default or an exodus from the euro zone is not a likely scenario. The most likely scenario seems to be some muddling through with measures that are not quite enough, but still a step in the right direction. The rating agencies are a bit mixed. Fitch last week cut Greece's sovereign rating to BBB+, the lowest of the rating agencies. S&P rates Greece A-,and negative watch, which is two notches above Moody's A1. Moody's placed Greece on credit watch with negative implications in October and given that Moody's rating is higher than the others, a downgrade in the coming weeks seems likely.

Nevertheless, if one believes the euro's nickel pullback in recent weeks is largely a reflection of year-end position adjusting and that further losses are limited and that Greece is not likely to default or drop out of the euro zone, then the 2-year Greece note may be an attractive way to express the view.

While the EU and the ECB make it clear that this is first and foremost a Greek problem, some indirect help is likely to be forthcoming. Consider that later this week the ECB will provide its last 12-month liquidity provision. Some of the funds may be used to purchase high yielding euro sovereign bonds.