Italy Bonds Yielding Five Times More Than Taiwan Lure Asia Funds to Europe

Taiwan’s biggest life insurer and South Korea’s largest financial company will follow Japan’s No. 3 banking group in buying more euro-zone bonds, taking advantage of Italian yields five times higher than those in Taipei.

Cathay Life Insurance Co. plans to invest in Italian and Spanish sovereign debt as their coupons are “attractive” after Greece won more bailout funds this week. Seoul-based Woori Investment & Securities Co. is researching auctions, seeking to profit from further gains in notes of the single-currency region. Mizuho Asset Management Co. in Tokyo bought Italian and Spanish notes last quarter.

Japanese buyers of overseas bonds are having the busiest start to a year since 2005, South Korean foreign-debt holdings rose to the highest in four years at the end of 2011 and Taiwan Life Insurance Co. said last month it is looking abroad for higher-yielding investments. Five-year notes yield 4.28 percent in Italy (GBTPGR5), 3.73 percent in Spain, 3.57 percent in South Korea, 0.94 percent in Taiwan (GVTWTO5) and 3.16 percent in China (CNTBI5).

“We are considering allocating funds to sovereign debt in countries like Italy and Spain,” said Allen Lee, the Taipei- based deputy manager of high-grade sovereign debt at Cathay Life that oversees about $95 billion. “Their yields are attractive, especially if the contagion risks of Greek problems are declining. The sell-offs in Europe give us opportunities to buy.”

Euro-Zone Returns

Italian notes returned 17 percent in 2012, second only to Hungary among 26 markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.

European finance ministers this week agreed to arrange 130 billion euros ($173 billion) in financial aid to Greece, Italy passed 20 billion euros of budget reductions in December, while Spain’s parliament approved a 15-billion euro package of spending cuts and tax increases last month. The European Central Bank has started an unprecedented emergency lending program.

Euro-area bonds have outperformed Asian notes this year. Five-year Italian yields slumped 192 basis points, or 1.92 percentage points, 42 basis points in Spain (GSPG5YR) and five basis points in Taiwan, data compiled by Bloomberg show. In South Korea they rose 11 and in China yields gained 13.

‘Room’ for Gains

Woori Investment is monitoring bond auctions in Germany, Spain, Italy and France and “may invest if prices match our expectations,” according to Lee Jeong Bai, the Seoul-based team head of fixed-income investment who oversees 1 trillion won ($888 million). “There is further room for European bond prices to rise,” he said in an interview on Feb. 13.

Spain sold 4.07 billion euros of bonds in three- and seven- year notes on Feb. 16 at yields ranging from 2.97 percent to 4.83 percent. Demand at the auction was more than twice the amount sold, according to data from the nation’s Treasury.

Five-year Italian bonds yielded 341 basis points more than German notes, having narrowed from 544 basis points at the end of last year. The spread on Spain’s securities over German bunds has shrunk to 286 basis points from 339 basis points, according to data compiled by Bloomberg.

Daewoo Securities Co., South Korea’s second-biggest brokerage by market value, says euro-zone debt securities aren’t as attractive anymore. Moody’s Investors Service cut the ratings of six European nations including Italy, Spain, Portugal and Slovakia this month, and Standard & Poor’s cut France’s AAA rating by one level on Jan. 13.

Not as Attractive

“We invested in France, Italy and Spain sovereign bonds at the end of last year and in January as prices were attractive even after considering the risks,” Oh Jong Hyeon, the Seoul- based head of fixed-income trading at Daewoo Securities that oversees 12 trillion won, said in an interview yesterday. “The region’s yields have fallen and now they are not as cheap as they used to be, and we have a more neutral stance on European bonds.”

Investor perceptions of euro-zone borrowers is improving. The cost of insuring Italy’s sovereign debt against default for five years using credit-default swaps has fallen 84 basis points this year to 400 basis points yesterday, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Similar costs for Spain have slid 115 basis from a record-high touched in November to 378 basis points. The contracts pay the buyer face value in exchange for the underlying securities should an issuer fail to adhere to its debt agreements.

Consumer Confidence

Italian consumer confidence rose more than economists forecast in February to 94.2 from a revised 91.8 in January, a statistics office report showed yesterday. The Munich-based Ifo (GRIFPBUS) institute said its German business climate index for February rose to the highest since July. The euro area’s economic slump eased in February as companies and consumers grew more confident, the Eurocoin index showed.

Japanese investors bought 4 trillion yen ($50 billion) more overseas bonds than they sold this year through Feb. 11, compared with 1.7 trillion yen a year earlier, according to the nation’s finance ministry.

‘Right Direction’

“With support from the ECB, the chance of a default risk spreading to Italy, Spain and Ireland from Greece has been reduced,” Shinji Kunibe, the Tokyo-based chief portfolio manager for fixed-income investments in Tokyo at Nissay Asset Management Corp. that manages about $68 billion, said in an interview on Feb. 16. “I would like to buy them again when yields rebound as I took profits from the recent yield declines.”

Ten of Asia’s 11 most-used currencies dropped versus the euro in the past month, led by the yen’s 6.8 percent decline. The won weakened 2.4 percent and China’s yuan dropped 2.7 percent.

The euro is poised to rally to the strongest level since November, Lloyds Banking Group Plc said on Feb. 10. The currency may rise to $1.36, Lloyds said, compared with $1.3388 today. The euro will also receive a boost from the ECB’s second unlimited three-year loan auction this month, Adrian Schmidt, a London- based currency strategist at Lloyds, said the same day.

“Policy makers are moving in the right direction,” Akira Takei, the Tokyo-based head of the international fixed-income department at Mizuho Asset that oversees $41 billion, said in an interview on Feb. 21. He said he holds more Italian and Spanish debt than the benchmark his fund tracks because “their higher yields make them a compelling investment destination.”

To contact the reporters on this story: Yumi Teso in Bangkok at yteso1@bloomberg.net; Jiyeun Lee in Seoul at jlee1029@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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