Institutional ownership of Greek, Portuguese and Irish Government bonds at new low

The news that S&P has downgraded the credit quality of Greek and Portuguese debts at both a sovereign and corporate level has once again thrust these struggling nations back into the limelight. This is despite reports that many in the EU are keen to restructure both Greece and Portugal. We look at institutional ownership information alongside short selling data to see professional investor trading sentiment. Our headline observation is that institutions have never owned fewer Greek, Portuguese and Irish Government bonds.

First up, Greece. The volume of Greek government bonds owned by funds that permit securities lending is a bellwether for institutional ownership. The data shows that these funds went as underweight (compared to their benchmark) as they could or sold their holdings entirely, mainly during the April to July period last year, when the first bail out took place. Until very recently, there was little movement. In the last few days their holdings of Greek Government debt dipped below USD 8 billion for the first time.

Clearly, mutual funds are negative on the outlook for Greek debt overall and have sought to deploy their funds elsewhere. It is interesting to note that short sellers are not active, with demand to borrow Greek sovereign debt trending lower. This is not a short selling story.

If we look at particular instruments, the standout mover is the 3.9% 20 August 2011 issue (ISIN:GR0114019442). A recent spike in the demand to borrow this issue means that a record USD 300 million is borrowed while the institutional ownership fell significantly in late January. Some people are presumably forecasting that Greece will struggle to redeem this bond given how close we are to its final maturity.

Portugal recently hinted its 2010 deficit could be worse than the forecast at 7.3% of GDP, which dwarfs the EU target of 3%. The fund flow scenario is similar to that of Greece. Institutional investors own just under USD 6 billion of Government debt and this is the lowest level over the past year. It is interesting to note that this is a lower figure than Greek Government debt, given that Greece has already been bailed out. A similar story applies to Ireland where almost exactly USD 6 billion of its sovereign debt lies with lending funds, which also represents an annual low.

Like Greece, a couple of near term Portuguese Government bonds show strong demand to borrow (3.2% 15 Apr 2011 ISIN:PTOTE4OE0040 and 5% 15 Jun 2012 ISIN:PTOTEKOE0003). This is hardly surprising given reports (WSJ et al) that Portugal is known not to have enough funds to repay bonds that mature post April.

Meanwhile, in the equity space, there is no sign that funds are covering their short positions in Banco Espirito Santo (ELI:BES), which shows 4% of its total shares outstanding on loan, representing almost 50% of the available supply. On the positive side, some funds who lend have increased their BES shares by 12 million in recent weeks so there is divided sentiment here.  Sentiment is more overtly negative regarding BES’s corporate bonds. The 3.75% on 19 Jan 2012 shows rising demand to borrow and falling supply. This is mirrored across others.

Banco Comercial Portugues (ELI:BCP) is another equity with diverging sentiment. Short selling is rising (but was higher in January) to 8% of all shares, but funds who lend are aggressively taking the opposite view having bought 80 million shares in BCP since January. Yesterday, BCP was reported to be proposing a capital raising at their shareholder meeting on April 18.

The situation is likely to come to a head soon and investors are being very active in anticipation.