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Pimco, Aberdeen: Avoid Volatile Italian Bonds

Pimco, Aberdeen: Avoid Volatile Italian Bonds

Friday, 01 June 2018 12:38 PM

Better to be safe than sorry on Italian assets.

Some of the world’s biggest money managers are shunning the nation’s bonds as this week’s blowout in market volatility and Rome’s unpredictable politics continue to damp sentiment.

While BlackRock Inc. and Aberdeen Standard Investment are steering clear of the securities, Pimco is skeptical the notes pay enough compensation for the heightened risks.

The slide in Italian bonds saw two-year yields surge by the most on record and benchmark spreads to German bunds balloon past 300 basis points on Tuesday. That’s much wider than that 200-basis-point “sticker price” at which Aberdeen Standard’s Luke Hickmore initially said he would look to go long the securities. He’s having second thoughts on that view now.

“I said before 200 over would be a starting point to look at Italy 10-year” bonds, said Hickmore, a senior investment manager at the firm, which overseas around $753 billion in assets. “We are way through that and still I find it really difficult to get tempted back in. This is the year of volatility. Jumping in now with both feet into Italy two-years or 10-years feels pretty preemptive.”

Italy’s bonds retraced some of their decline, with the 10-year yield retreating to 2.76 percent on Thursday, from a four-year high of 3.44 percent reached on May 29, amid signs the nation’s populist leaders were willing to soften their stance to solve the political crisis. While the nation successfully sold five- and 10-year debt at an auction Wednesday, the pricing of the longer-dated security still showed signs of the pessimism that has battered the market this week.

More Volatility

Investors remain on edge as rifts have emerged between Italy’s populist parties. This week’s violent moves wiped out around 66 billion euros ($77 billion) from the nation’s bond market, one of the biggest in the world, and saw liquidity evaporate. Heavyweight fund BlackRock said it would choose to “navigate” the volatility before deciding on value.

The turmoil in Italy could turn “cataclysmic for markets,” said Andrew Jackson, the head of fixed income for Hermes Fund Managers Ltd. in an interview with Bloomberg Television. While the probability of that is still low, Jackson said the recent events had caused investors to rethink their allocations.

“I do think people are now looking at the risk out there,” London-based Jackson said. “People are looking back at their portfolios and saying ‘How much risk do I have here?’ and re-calibrating what they expect to be paid for that risk.”

Even a smaller yield spread would be preferable if that came with “better visibility” on the risks involved, according to Mary Pieterse-Bloem, the global head of fixed-income strategy and portfolio management at ABN Amro Private Banking.

While fund managers don’t see the risk of Italy leaving the euro bloc, Aberdeen Standard’s Hickmore said “better quality” emerging-market assets might be more attractive currently than Italian ones.

“If you are buying Italy you’ve got to think about other choices you’ve got around,” he said. “What other markets can you go to where you get similar yields but without the volatility. There are still opportunities out there.”

While the probability of Italy leaving the euro remains low, investors would now look for sufficient compensation for such risk and the country’s bonds don’t offer that yet, according to Andrew Balls, chief investment officer of global fixed income at Pimco.

‘There are rude-awakening risks in terms of populism in the euro zone and potential for markets to price in much more risk premia,” he said. “We’re not forecasting any sort of Italy exit but you do not need a high risk of this to happen in order to want much more risk premium.”

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Better to be safe than sorry on Italian assets.Some of the world's biggest money managers are shunning the nation's bonds as this week's blowout in market volatility and Rome's unpredictable politics continue to damp sentiment.
italy, bonds, pimco, aberdeen, italian, investors
Friday, 01 June 2018 12:38 PM
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