If there were any remaining doubts about investors' "reach for yield," today's Greek bond news should lift them. This massively oversubscribed offering speaks to a strong market appetite for the first internal bond issuance since 2010 by a sovereign that – only two years ago – imposed significant losses on private bondholders; and it did so without being able to deal decisively with its excessive indebtedness.
The scramble for the new Greek bonds is but the latest indication of a "carry trade" that is back in full force and, as explained here, for understandable reasons. It's a market phenomenon that is likely gain further momentum in the weeks to come as competitive pressures accentuate the opportunity costs of below-carry portfolios.
As this phase continues to plays out, investors would be well advised to remember four key historical insights:
First, investors' romance with carry trades flourishes in relatively stable economic environments, particularly when interest rate volatility is relatively low. These days, central banks are also acting as matchmakers by repressing risk-free interest rates. (And yesterday's Federal Open Market Committee minutes confirm that the Federal Reserve is committed to this policy approach.)