Armstrong Investment Managers is selling the Italian bonds it bought last year, making a 15 percent return, after they surged as European policy makers stepped up efforts to stem the region’s debt crisis.
The money manager, which purchased the securities in November and December, has reduced its position by half and will exit completely should they rise any further, said Patrick Armstrong, managing partner at the company, which has about $353 million under management. The bonds currently account for about 3 percent of the firm’s total holdings, down from around 6 percent in December, he said.
“I don’t see a significant rally much beyond where we are now,” Armstrong said today in a telephone interview from London. “We’re not worried about Italy’s solvency but we think the bonds are about fair value where they are now. They’ve had a good run.”
Italian and Spanish 10-year yields have dropped more than 1.5 percentage points from euro-era record highs set in November after the European Central Bank said on Dec. 8 it would provide unlimited three-year loans to banks to boost lending. Spanish Prime Minister Mariano Rajoy said on Jan. 30 the extraordinary facility was “useful” for the nation’s sovereign debt.
The securities extended gains today as European finance ministers awarded 130 billion euros ($172 billion) in a second aid package to Greece, easing concern the sovereign debt crisis will spread.
Armstrong said he’s selling the Italian 5 percent bond maturing in March 2025 and the 6.5 percent security due in November 2027, both of which he bought when they were yielding more than 7 percent.
The yield on the March 2025 bond dropped five basis points today to 5.64 percent at 12:06 p.m. in London, after rising as high as 7.71 percent on Nov. 9 according to data compiled by Bloomberg based on closing prices. The November 2027 security yielded 6.01 percent today, down from 8.09 percent on Nov. 25.
“There is always going to be risk with Italy,” Armstrong said. “It has a high debt-to-GDP ratio and competitiveness problems which will only be solved with a weak euro. If something bad happens and Italian yields will blow out, we may buy again.”
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