Investors turn their eyes on Greek yields

The shares and bonds of both countries have been the best performers in Europe in 2014, and funds invested in them raking in money, Thomson Reuters data shows.

Investors say they are driven by economic improvement, but potential investment alternatives have become less tempting. Tensions between the West and Russia and global growth concerns cloud the outlook for similar-yielding emerging markets, while a 1-1/2 year rally has shrunk returns elsewhere in euro zone debt.

Greece's ATG and Portugal PSI 20 stock indexes have been the best performers in Europe so far this year, having risen about 14 percent. The STOXX Europe 600 index is close to where it began the year.

Greek and Portuguese 10-year bond yields have fallen roughly 150 bps this year to roughly 7 percent and 4.4 percent, compared with 50-90 bps falls in fellow peripheral states.

While the small size of the Greek and Portuguese markets discourage some investors, it also means that a relatively modest inflow of money into those countries has a large price impact.

Even after their recent rebounds, Greek and Portuguese shares trade at steep discounts to their European peers, based on the value of their assets, Datastream data showed. This compares with hefty premiums before the crisis.

Junk-rated Greek bonds still offer higher yields than those for the rest of the euro zone and emerging countries such as Romania and Hungary. Portugal's yield is comparable to Poland's.

Data from Markit show the ratio of long to short positions in Spanish, Italian and Irish bonds is already high on the expectation of falling bond yields, suggesting little room for a further rally.

The ratio on Spanish bonds shows investors almost as bullish as they have been in five years.

Research by Citi shows that European asset managers were long or very long in Italy and Spain, while in Portugal, Ireland and Greece the same investors were only slightly long or neutral.

Japanese investors were still short or very short all peripheral markets, while hedge funds were longer in the lower-rated periphery than in Italy and Spain.

While Greece and Portugal still have enormous debts, the progress they have made so far makes them a more attractive investment than many emerging markets, investors said.

Emerging economies are facing an uncertain future as the Ukraine crisis casts a shadow on eastern Europe, China's economy slows and the Federal Reserve curbs its easy money policy, triggering outflows from countries with weaker currencies.

This trend was seen as especially beneficial for Greece, which was reclassified by index operator MSCI as an emerging market last year and is set for a windfall as EM-focused fund managers cut their positions in countries such as Brazil, Russia, India and China, known collectively as the BRICs.

A Lipper basket of funds invested in BRIC equities suffered net outflows of 249 million euros in January, while Greek equities lured 22 million euros.

Since the start of the year, a FTSE exchange-traded fund (ETF) invested in Greek blue-chip stocks attracted net inflows equal to over a third of its current total assets under management, Markit data showed.