Sovereign bonds have long been used by investors to increase their wealth. Many of our investors will remember the days of Brazil sovereign bonds in 1999 and the Russian sovereign bonds around the same period which allowed them to realize sizable capital appreciation in the subsequent years. These bonds were selling at significant discounts during the late nineties due to instability in the respective markets. Brazil was experiencing high levels of inflation, a currency devaluation and a slowdown in economic growth. Similarly Russia was reeling under massive fiscal deficits and ultimately pursued a restructuring of its debt. Nevertheless, discerning investors who bought those bonds enjoyed handsome coupons of 14.50 per cent p.a. and 12.75 per cent p.a., respectively and significant capital gains on their investments.

Sovereign bonds are debt securities issued by the Government of any country. The securities are usually denominated in a foreign currency, because Governments try to target the currency of the most stable economies in order to make their debt as attractive as possible. It also allows them to appeal to a much wider market since international investors can purchase their bonds without taking on the foreign exchange risk of bonds denominated in local currencies.

When choosing to invest in sovereign bonds, a major concern for investors is default risk. This is the risk that the issuer of the bonds will be unable to pay back the investors according to the terms of the agreement. Governments with low credit ratings are at higher risk of default and offer higher coupons to compensate the investor for this risk. In contrast, Governments with high credit ratings are at lower risk of default and their bonds attract lower coupons.

Greece presents an interesting example of a country which may present itself as an opportunity for the return hungry investor. Greece quickly became one of the first casualties of the European debt crisis which commenced in late 2009. By May 2010, the country had received a bailout package from the IMF and the European Union to the tune of $110 billion, an amount deemed sufficient to fund the Government’s obligations for the next three years. In a December 7th 2010 press release, IMF managing director, Dominic Strauss-Khan noted the strides that Greece had made so far under the IMF program. Greece has already achieved a narrowing of its fiscal deficit, an improvement in the public financial management and tax administration systems as well as the strengthening of its financial sector and completion of pension reform.

Should the bailout accomplish its intended purpose, we could view Greece as a country on the mend. As the global economic conditions improve, it is believed that the Greece economy will begin to grow. This new growth will be taking place within a new and enhanced fiscal and monetary macro economic framework as devised by the IMF and the Greek authorities. The IMF remains committed to extending Greece’s repayment schedule in furtherance of its support to that country and to the preservation of the European Monetary System.

Turning to returns on Greek bonds, we find that those maturing in 2013 are currently yielding approximately 11per cent p.a as at Wednesday 8/12/2010. On this date too these bonds were the most heavily traded security with a turnover of 19 million Euros. The bailout package has given these bonds a kind of implicit guarantee to be paid out on maturity and as such they appear to be a relatively safe investment. In other words, they are not expected to be the subject of any default action. However, the situation is quite dynamic and there is no telling what will happen as the European debt crisis spreads from one country to another. Politicians will play a major role in determining how the problems will be resolved and this will only add to the uncertainty surrounding the eventual outcome.

Many investors have made money buying bonds when their prices are depressed. Jamaican Government bonds are one example of these and they, from time to time, have done well in the market, depending on the timing of investors’ purchases and sales. Like all other investments, bond prices are volatile and certainly do not go up ad infinitum. There are peaks and troughs and investors should ask their advisors to help them to choose the best time to buy and sell in order to optimize the value of their investments.

Pamela Lewis is the Manager of Investment and Client Services at Sterling Asset Management. Sterling provides medium to long term financial advice and instruments in U.S. and other world market currencies to the corporate, individual and institutional investor.

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