Standard Life Investments said it isn’t tempted to buy Greek, Portuguese and Irish securities as they get cheaper and yields surge, given it remains skeptical about the fiscal outlook for Europe’s most indebted nations.
“You have to be an adrenaline junkie to be very active in those markets,” Frances Hudson, head of global thematic strategy at the division of Standard Life Plc, said in an interview in London today. “We aren’t heavy in any of the peripherals. It’s obvious people are going to buy German bunds for safety.”
Standard Life Investments prefers pound-denominated assets to those in euros given Britain’s perceived political stability is drawing foreign investment as the sovereign-debt crisis persists, Hudson said.
Irish and Portuguese bonds tumbled today, pushing yield spreads on their 10-year securities over benchmark German bunds to records on renewed concern that European banks are vulnerable to losses on their holdings of peripheral debt. German and U.K. bonds rose today, while the pound climbed against the euro.
Greek 10-year government bonds also fell today, widening the spread over bunds to the most since May 7. That was the last trading day before the European Central Bank said it would buy sovereign bonds to back a European Union bailout plan. The Wall Street Journal, citing its own analysis, reported on its website yesterday that stress tests underestimated some banks’ holdings of potentially risky government bonds.
Standard Life Investments, which is based in Edinburgh, has $175 billion of assets under management.
Foreign investors bought a net 5.6 billion pounds of U.K. government bonds in July, compared with a net sale of 674 million pounds in the prior month, Bank of England data released on Aug. 31 showed.
“Sterling is enjoying a safe-haven status, while you have wobbles in the euro because of concern over peripheral countries,” said Hudson.
The U.K.’s Conservative-Liberal Democrat coalition government, which took power in May, is also becoming less of a concern to international investors given what has happened in other recent national votes, she said.
“We’ve had a series of elections in developed countries this year, and all of them produced less decisive outcomes,” Hudson said. “We still don’t have an effective coalition in place in Belgium. Australia struggled to form one. This makes the U.K. look better by comparison.”
Standard Life prefers U.K. corporate bonds to gilts to take best advantage of inflows to Britain, Hudson said.
“You can still get some pick-up in yields in the corporate bond market,” Hudson said. “Gilts have had a 10 percent return this year. It’s unlikely they will give another 10 percent.”
The Bank of England is unlikely to expand its bond-purchase program, known as quantitative easing, given U.K. economic data is improving, Hudson said. The central bank will probably keep its official rate at a record low of 0.50 percent for at least a year, she said.