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Norway's puzzling purchases of Greek bonds

The bonds of the Greek government and other heavily indebted European countries are considered the financial equivalent of high-grade toxic waste.

But one high-profile investment name isn't buying the conventional view that these securities will contaminate the performance of a portfolio. The fund that manages Norway's massive oil and gas wealth has been buying Greek bonds. It hasn't stopped with that risky call, and is also loading up on the unloved bonds of Portugal and Spain, among others.

The move by the highly regarded fund has focused attention on the investment merits of Europe's high-yielding sovereign bonds, which in the case of Greece are offering about 11.5 per cent if held to maturity, while those of Portugal clock in at about 6.3 per cent, both for 10-year terms.

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Norway's move could be the ultimate, contrarian call. The optimistic view is that the fund is acquiring beaten-down bonds with some of the highest yields available anywhere in the world, at a point of extreme market pessimism. The yield on the same duration, super-safe bonds of the U.S. and German government, the so-called flight to quality bonds, are paltry, at under 3 per cent.

Not Many Takers

But right now, few are willing to tread along side the plucky or foolhardy Norwegians, depending on the point of view.

The Canada Pension Plan Investment Board isn't loading up on Greek or other risky country bonds. The board, manager of Canada's federal pension plan, buys bonds to match a Citigroup index of G7 country debts.

"If there is any active investment investing on top of that ... it would be minimal," says Linda Sims, a board spokeswoman.

Fairfax Financial Holdings, one of Canada's best-known contrarian investors, has looked at beaten-down European sovereigns as a possible value play, but hasn't acted.

Neither has Pacific Investment Management Co., the world's largest bond fund, with $1.1-trillion (U.S.) under management, .

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Scott Mather, a Pimco managing director, isn't buying high-yielding European debt because he believes the financial crisis there isn't anywhere near over and we're "closer to the beginnings of the problem than we are the end."

Challenges Ahead?

One sign that more European debt problems may lie ahead is the upward march in Greek 10-year bond yields, which fell to around 8 per cent in the aftermath of the European Union's €750-billion ($990-billion U.S.) sovereign rescue package in May. The bonds trade around 70 cents on the euro, indicating many investors fear they won't be repaid in full because of a default or restructuring.

Even more worrisome is that Greek yields have risen sharply since May even though the European Central Bank has been purchasing massive amounts of debt from the risky countries in the open market, which should have driven rates down. The only explanation is that selling by other market participants is overwhelming these efforts.

These pressures are likely coming from big European banks. There is an informal moratorium on the institutions dumping Greek and other risky euro government debt, but there is speculation the banks are slowly bailing out of their holdings anyway by not rolling over bonds as they mature

"That means that every [high-risk sovereign borrower]has to find new incremental buying for all the existing holders that are slowly leaking positions out, and it's very difficult to do," Mr. Mather says.

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High-Risk Investing

An illustration of the effect in action may have been Ireland's bond auction Tuesday, where four-year bond yields rose to 4.77 per cent, up sharply from 3.63 per cent at last month's sale.

The countries do have austerity plans to reduce the amounts they need to borrow, but even if they achieve them, Mr. Mather says they'll still be faced with high debt burdens and uncompetitive economies, leaving them vulnerable to a downturn in growth. The higher interest rates on new borrowings also offset part of their deficit cutting.

Mr. Mather contends that the elevated yields the countries offer do not yet adequately compensate for these risks.

Norway's Ministry of Finance did not return requests for comment, but the country's Finance Minister Sigbjoern Johnsen told Bloomberg last month that he backs the fund's strategy of buying the risky debt.

Jon Nadler, who writes a blog at, a website for gold investing, was inspired by the Norwegian purchases to write a column about them to the firm's gold bug clientele.

He said the purchases are a sign that the big wealth fund - generally considered a level-headed investor with a long-term perspective - doesn't see the financial world unravelling any time soon, something that should give pause to those clamouring to buy gold at record prices.

If the fund was "concerned about Greece and the whole risk of the European debt, they would have run out and probably bought gold for their portfolios," he says.



As of yet, there are no funds or ETFs that focus on investing in high-yielding European government bonds.

The debt crisis in Europe, which arose this spring, is too recent to have prompted the financial community to develop and market products that would allow investors to take a flyer on a basket of risky European government bonds.

But some investment banks, particularly those with European links, such as UBS Canada, will buy Greek and other high-yielding bonds in response to customer requests. The European-based banks tend to cater to high-net-worth individuals and not average retail investors.

All investors should be mindful of the dangers involved in reaching for the high yields on Greek and other risky European sovereign debt. The sky-high current yields indicate big hedge funds and institutions are betting the European debt crisis isn't yet over.

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