Investors should sell so-called peripheral euro-region bonds against benchmark German bunds as optimism stemming from tests on the region’s banks fades, according to Royal Bank of Scotland Group Plc.
“We all know that the stress tests were irrelevant, but we have to accept that they gave everyone a mild feeling of euphoria,”Andrew Roberts, head of European rates strategy at RBS in London, said in a telephone interview today. “The tightening in the periphery, the rally in European stocks, and the view that everything is fine is complete. Now is the time to get short peripheral spreads and get loaded up on the story that Europe’s troubles are coming back to haunt them.”
The yields on the bonds of Greece, Ireland, Spain and Portugal rose to records relative to Germany this year on concern the countries would fail to close their budget gaps after the financial crisis ravaged their economies. The spreads narrowed after the European Union and the International Monetary Fund crafted a 750 billion-euro ($969 billion) rescue package to ward off investors speculating on the break-up of the euro.
The peripheral nations may have to tap the rescue fund if the global economy gets worse, Roberts said.
“They are totally at the mercy of the global business cycle,” he said. “If it turns over it’s going to get very messy for Europe in terms of sovereign credits and the banking system.”
Greek 10-year government bonds were little changed relative to Germany, leaving the yield spread at 832 basis points, or 8.32 percentage points, as of 2:15 p.m. in London. The Irish- German 10-year yield spread narrowed four basis points to 288 basis points, while the Portuguese-German spread fell eight basis points to 273 basis points. The Spanish spread dropped nine basis points to 165 basis points.