* Greek 10-year govt bonds return 15 pct in year to date
* Portugal consistent underperformer with negative returns
* Italian bond returns turn negative in Q4 on politics
By Dhara Ranasinghe and Alasdair Pal
LONDON, Dec 15 Bailed-out Greece was the best
performing euro zone government bond investment this year, while
Portugal lost the most money for investors as fears about its
banks, economy and credit rating conspired against bondholders.
Returns on Italian sovereign bonds, positive for much of
2016, turned negative during the fourth quarter on worries about
the referendum on constitutional reform that led to the
resignation of Matteo Renzi as prime minister.
But for holders of volatile Greek bonds, the rocky ride may
have been worthwhile. Returns for benchmark 10-year government
bonds were down 19 percent in February but are ending the year
up roughly 15 percent, according to Thomson Reuters Datastream.
"There has been volatility but in terms of performance this
year, it's been fantastic if you've had the appetite for
Greece," said Padhraic Garvey, ING's global head of debt and
Greece, which also delivered positive returns in 2015
, is on its third international bailout since crisis
first hit the indebted euro zone state in 2010.
It hopes a deal with its lenders on its latest bailout
review will pave the way for inclusion in the European Central
Bank's bond-buying stimulus programme early next year, allowing
Greece to test markets with a debt issue later in 2017. Greece
last issued bonds in 2014.
The European Stability Mechanism bailout fund said on
Thursday, however, it had suspended measures aimed at cutting
Greece's public debt, sending Greek yields to one-month highs.
But analysts said they were not too concerned about the outlook
for the bond market.
In contrast, Portuguese 10-year government bonds
have lost around 8 percent so far this year and
Italian peers have shed about 1 percent.
Stronger economic growth globally, expectations of fiscal
expansion under U.S. President-elect Donald Trump and rising oil
prices have lifted inflation expectations, just as a perception
grows that an era of ultra-loose monetary policy is coming to a
close. The U.S. Federal Reserve delivered its first rate hike in
a year on Wednesday and signalled a faster pace of increases in
Against this backdrop, government bond returns generally are
expected to suffer. Portugal, viewed as one of the weakest links
in the 19-member euro zone, remains vulnerable. There are also
worries that Portugal may not benefit fully from an extension of
the ECB's bond-buying scheme because the central bank may face a
scarcity of elible Portuguese debt.
Portugal's 10-year borrowing costs have risen 134 basis
points so far this year, set for their first yearly rise since
the euro zone debt crisis in 2011.
Then country's banking sector remains weak, economic growth
is modest and government debt at just under 130 percent of GDP
is not expected to fall much next year.
A sell-off earlier this year on fears Portugal could lose
its last investment grade rating -- from DBRS -- which it needs
to qualify for the ECB's bond-buying programme, highlights just
how sensitive investors are to the power of that backstop.
"One reason why we went more underweight on Portuguese debt
was the idea that Portugal would not be as fiscally responsible
as some had hoped a year ago -- especially when you compare it
to other countries such as their neighbor Spain," said Ira
Jersey, a fixed income strategist and portfolio manager at
Spain's 10-year bonds have returned 4.5
percent so far this year and top-rated German bonds returned 4
percent in the year to date.
(Reporting by Dhara Ranasinghe; Graphic by Alasdair Pal,
Editing by Jeremy Gaunt)