Halister News

(Bloomberg) -- While there’s still some potential upside in EGBs, there’s quite a bit of downside risk after the tightening in 2015, UBS Wealth Management analyst Thomas Wacker says in interview.

• Most of the bonds of double A and single A-rated countries will only achieve small excess returns which even a low single-digit widening could erase, making it almost impossible to outperform bunds
• A failure of the ECB to meet the high market expectations for more easing in March could trigger a sharp correction, Wacker wrote earlier in client note dated Feb. 4
• While the carry trade in BTPs and SPGBs was successful during QE, spreads could widen enough to offset the potential excess return as soon as the end of ECB QE comes into focus
  • 12 months from now it’s likely we’ll see more spread differentiation and stronger spread moves for those countries with ongoing issues, such as Spain, if QE is over with
• The only exception in the periphery is Portugal where there has been a remarkable underperformance and there has been some kind of settlement on budget talks, suggesting the issue may be off the table for a while
  • Even in Portugal, there remains a concern among investors that if the country loses its IG status it could be excluded from QE and spreads could widen
• Favor corporate debt which wouldn’t be impacted as much by a change in the policy backdrop