Yields on Greece's new bonds may climb to as high as 20 percentamid “material risks” stemming from implementation of terms for thebiggest sovereign restructuring in history, according to MorganStanley.

Traders are offering to buy and sell the potential new bonds atyields on 11-year securities of 22 percent, according to a personfamiliar with the prices who declined to be identified. Yields onexchanged Greek debt may be about 13 percent to 17 percent “in themedium term” as the nation faces an election and seeks to complywith terms of its bailout and debt-reduction programs, NewYork-based Morgan Stanley said yesterday in a research report.

Private investors agreed to swap about 85 percent of their Greekgovernment bonds for new securities, according to a banker briefedon the results. The goal of the exchange, results of which arescheduled for release later today, is to reduce the 206 billioneuros ($273 billion) of privately held Greek debt by 53.5percent.

While the debt swap hasn't yet been finalized, trading new Greekbonds in the so-called gray market may be attractive to investorsas they seek ways to hedge their holdings amid political debate andconcern that credit-default swap insurance on the debt may not payout, said Russ Certo, managing director of rates trading atGleacher & Co. in New York.

“You're in the world of opposites and unintended consequences,”Certo said in a telephone interview yesterday. “There are somewilling sellers of sovereign paper in the secondary market rightnow because they don't feel they're getting adequate protection inthe CDS market. People are hedging bets.”

The bonds are being offered on a “when-and-if-issued basis,”meaning that trades will be settled provided Greece's debtrestructuring is successful, according to rules posted on thewebsite of the Emerging Markets Trade Association. The new 15-yearGreek bonds may yield about 20 percent, said the person familiarwith the prices who declined to be identified because he wasn'tauthorized to comment.

The EMTA, a trade group in New York, also posted rules forseparate trading of the warrants that Greece will give investorsthat provide extra income in years when Greek economic growthexceeds certain thresholds.

Pessimistic Outlook

The market may receive as much as 65 billion euros of new Greekbonds with an average maturity that's increased to 20 years fromseven years, Morgan Stanley fixed-income strategists Paolo Batoriand Robert Tancsa and economist Daniele Antonucci wrote in thereport. Absent “surprises,” the securities may stabilize at about25 cents on the dollar, they wrote.

The prices that the new bonds are trading at show that investorsare pessimistic about Greece's prospects after the debt swap,according to Mark Grant, managing director at Southwest SecuritiesInc.

“They couldn't pay the old debt back, so how do they pay the newdebt back?” Grant said in an interview from Fort Lauderdale,Florida.

Preliminary indications showed that as much as 155 billion eurosof the 177 billion euros of Greek-law bonds were offered, said thebanker, who declined to be identified. Twelve billion euros ofbonds not under Greek law was also tendered, as was 7 billion eurosof debt from state-owned companies guaranteed by the government,the banker said.

Finance Minister Evangelos Venizelos will hold a pressconference at 1 p.m. Athens time, the Finance Ministry said in ane-mailed statement.

Bloomberg News