Pimco Sees Risk of Complacency for Spain as BlueBay Sells Bonds

Policy makers are “complacent” and risking investment in Spain by failing to take enough action to stabilize the nation, according to money managers at Pacific Investment Management Co. and BlueBay Asset Management Ltd.

Pimco, which manages the world’s biggest bond fund, is holding back from going “maximum overweight” on Spanish and Italian debt until the situation is clearer, according to Andrew Balls, head of European portfolio management in London. BlueBay said it is selling the securities.

Spanish and Italian bonds rose after the European Central Bank said on Sept. 6 it was ready to buy the bonds of the most indebted nations, before giving back some gains last week as Spain’s Prime Minister Mariano Rajoy resisted asking for a bailout that would trigger the purchases.

“There’s a lot of execution risk so this is not something where we would go to maximum overweight,” Balls said in an interview on Bloomberg Television’s “The Pulse” with Francine Lacqua. Pimco will reconsider the amount of the bonds it holds relative to its benchmark when it sees “a lot more evidence” that the ECB and euro-area nations “will be able to deliver greater stability,” he said.

Spain’s 10-year bond yield was little changed at 5.65 percent at 2:19 p.m. in London. The yield climbed to a euro-era record of 7.75 percent on July 25 before falling to a six-month low of 5.26 percent on Oct. 19. Italian 10-year bonds yielded 5 percent, down from as high as 7.48 percent on Nov. 9.

‘More Positive’

Investors who bought Spanish securities on Sept. 6, when ECB President Mario Draghi announced the central bank’s willingness to buy the securities of nations that request aid, have made a return of 2.7 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 0.6 percent in the same period.

“A month ago, we were more positive on the periphery in the wake of the ECB action,” said Mark Dowding, a senior fixed- income portfolio manager at BlueBay in London, which oversees $47 billion. “Since that time, we’ve seen complacency on the part of policy makers, complacency in Spain, no progress has been made in terms of an aid request. Now is the time to reduce.”

Rajoy told reporters at a press conference in Madrid yesterday that he will only ask for a bailout when he judges it’s in his country’s best interest. European officials haven’t specified what conditions would be attached to such aid.

“It is a difficult situation for Spain,” Pimco’s Balls said. “Spain wants to make sure that it has a clear idea of the terms and a clear idea of what the ECB will do. It is likely that they will apply relatively shortly.”

Pimco purchased Spanish bonds “earlier in the summer,” Balls said, ending the company’s three-year policy of holding a smaller proportion of the securities than appear in its benchmark index.

“The markets have shown some patience,” he said. There’s “complacency on the side of the creditor countries and on the debtor countries. If they can have a reasonable plan and a reasonable commitment to implement it, then I think they can build upon the progress of the past few months.”

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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