The Great Debate UK
from Felix Salmon:
Many thanks to Van Tsui and Scott Barber for putting this chart together for me. We're all used to seeing yield curves -- charts which show the yield, for any given credit, at various points along the maturity spectrum. This chart is different: it's a price curve. It just shows the price at which Greek bonds are trading, plotted according to their maturity.
And it's really odd.
To understand just how odd this chart is, it's important to realize that in the Greek bond exchange, there's only one menu of options for anybody holding a Greek bond. It doesn't matter if your bond is maturing in six months or if it's maturing in 26 years, the instruments you're given the choice of swapping into are all exactly the same.
The way that the bond exchange has been structured, the new Greek bonds are all going to trade at roughly the same price, at least in the first instance. If they didn't, then everybody would simply pile into the most valuable instrument. We won't know exactly what price they'll be trading at until they start changing hands, of course, but I've marked a range between 62 and 75 cents on the dollar in the chart. At 62 cents on the dollar the bonds would be trading at an exit yield of 13%; at 75 cents on the dollar they would be trading at an exit yield of 9%. Chances are, when the bonds start trading, they'll be somewhere in that range.
For the bonds which are trading at or near that range, the exchange makes sense. You swap one bond for another bond worth pretty much the same amount, and Greece gets a bailout at the same time. Net-net, you're better off.