BlackRock Sees Deflation-Fight Boost for Spain, Portugal Bonds

Europe’s highest-yielding government bonds will gain support from the European Central Bank’s efforts to stave off the risk of deflation, according to BlackRock Inc.

Spanish and Italian two-year yields fell to records today, boosted by the prospect of extra ECB action to stimulate the economy after a Jan. 31 report showed annual euro-area inflation slowed to 0.7 percent in January, matching the lowest rate since 2009. While BlackRock sold some bonds from those nations as they rallied last month, it’s betting Portugal’s notes will extend their advance, said Stephen Cohen, head of investment strategy for international fixed income.

“The inflation data again argues for the ECB to work toward how it’s going to be more accommodative to avoid any risk of deflation,” Cohen said in a phone interview from Basel, Switzerland on Jan. 31. “That’s going to support fundamentally peripheral spreads in Europe.”

Italian two-year yields fell as much as five basis points today to 0.875 percent as of 3:06 p.m. London time, the lowest since Bloomberg started tracking the data in 1993. The rate on similar-maturity Spanish notes touched 0.918 percent, also the least on record.

ECB policy makers, led by President Mario Draghi, lowered the main refinancing rate to a record-low 0.25 percent in November to counter slowing inflation. The Executive Board will meet again this week and announce its policy decision on Feb. 6.

Improving economic data in the euro region has caused the extra yield investors get for holding Spanish and Italian debt instead of benchmark German securities to shrink so quickly that the potential for further tightening has “diminished,” Cohen said.

“Where we have maintained exposure within the periphery is Portugal, where we feel there is still room for the recovery theme to feed through to further spread tightening,” he said.

The rate on 10-year Portuguese debt dropped to 4.92 percent today, the lowest since June 2010. The two-year yield fell five basis points to 2.44 percent.

To contact the reporter on this story: Eshe Nelson in London at enelson32@bloomberg.net

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

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