HALISTER1: Fund Managers Favor Spain, Italy Bonds as Brexit Raises QE Hope

Fund Managers Favor Spain, Italy Bonds as Brexit Raises QE Hope

(Bloomberg) -- Spanish bonds hold more value as country’s general election is out of the way even as prospects of more QE to counter fallout of Brexit underpins Italian bonds, according to fund managers.
  • ECB seen facing a shortage problem soon give the low yields environment in bonds market
  • Fund managers see any increase in BTP yields on the back of financial, political concerns in Italy as an opportunity to buy as ECB QE keeps working as backstop
  • Pimco
    • Remains constructive on Italian and Spanish bonds as the macro uncertainty generated by Brexit is likely to prompt ECB to boost stimulus in coming months, portfolio manager Nicola Mai says in interview
    • Expects peripherals bonds to benefit but cautious in medium-term
    • ECB will probably tweak QE in order to expand the universe of eligible bonds, for instance by moving away from the capital key rule, though that may not be announced in July/Sept.
    • Political risk in Europe has moved from Spain to Italy as the constitutional referendum in October may see Renzi resigning in event of a “no” vote win
    • If constitutional referendum doesn’t go through, it would pave the way for a prolonged political uncertainty in the country and BTPs may sell off
    • Any selloff could offer an opportunity to buy as the risk of a new populist and anti-European government in Italy, led by Five Star Movement, in the near term is low: MORE
  • Pioneer
    • Fund turns bullish on Italian sovereign bonds, and expects the ECB to provide a backstop against significant periphery spread widening if needed, Tanguy Le Saout, head of European fixed income, says in a phone interview
    • Fund went long BTPs versus bunds after the Brexit vote, having noted higher-than-usual ECB buying of BTPs last week
    • Possible progress in Italian govt’s plans to address the NPL burden of domestic banks, which has been exacerbated by Brexit, could work in favor of the trade: MORE
  • Baring Asset Management
    • Fund has added to its holdings of Italian bonds on conviction the ECB will act to support the nation’s debt in case of a need, Alan Wilde, London-based head of fixed income and currencies, says in an interview
    • Bought 10-year notes; is also long on Spanish debt of the same tenor; was neutral on peripheral exposure going into the U.K. referendum
    • Favors Spain over Italy after local election and against backdrop of Italy’s domestic politics, including the constitutional referendum likely to be held in October: MORE
  • Kames
    • Fund favors Spanish bonds over Italian as Spain’s fundamentals are better, John McNeill, investment manager for fixed income, says in a phone interview
    • Spread between Italy and Spain is too narrow as Spanish credit fundamentals are better than Italian ones; reforms, growth, deficit trajectory also bode well for Spain
    • Italian bonds are trading expensively compared with country’s fundamentals and they will continue to do so as ECB QE program is likely to be extended beyond March 2017, probably for 6 months
    • If Italian bonds come under further pressure, ECB may front load the monthly purchases and this would be a “de facto” shift from the capital key rule: MORE
  • Fidelity
    • Peripheral yields are attractive; Spain probably offers better value as elections are now behind us, while political risk in Italy is increasing, sovereign analyst Dierk Brandenburg says in interview
    • BTP downside protected given ECB backstop; prospect of ECB changing the QE program to increase the universe of eligible bonds also supporting Italian bonds
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
2103Z IM (Republic of Italy)
2539Z GR (European Central Bank)

People
Alan Wilde (Baring Asset Management Ltd)
Dierk Brandenburg (Fidelity Investment Management Ltd)
John McNeill (Aegon NV)
Matteo Renzi (Republic of Italy)
Nicola Mai (Pacific Investment Management Co LLC)

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