Irish, Portuguese Bonds May Rally, Top Fund Manager Says

Irish, Portuguese Downgrade to Spark Rally
A pedestrian pushes a bicycle past a Bank of Ireland automated teller machine outside a company branch in Dublin. Photographer: Aidan Crawley/Bloomberg

Europe’s best-performing sovereign debt fund manager over the last decade, Sandor Steverink, correctly predicted Portugal’s downgrade this week and says Ireland will soon follow. Then it’s time to buy, he says.

Steverink, who is co-head of a team managing 26 billion euros ($37.3 billion) at Dutch insurer Delta Lloyd NV, plans to buy Irish bonds once the ratings companies cut the debt to junk as Moody’s Investors Service did with Portugal on July 5. The extra yield investors demand for holding 10-year Portuguese bonds instead of the equivalent German bund surged yesterday to 10.13 percentage points, the most since at least 1997, before falling by as much as 43 basis points today.

“What we’ve learned from emerging markets is that you get only a full recovery after a proper restructuring,” Steverink, 40, said in a telephone interview. “We think that’s necessary for Greece and, in the end, probably for Ireland and Portugal, too. We prefer Ireland above Portugal.”

Holders of Greek debt reaped the best returns of any sovereign-debt market in the two weeks after the government approved austerity policies and secured more European Union aid to pay creditors. Steverink’s Delta Lloyd Instl Obligatie LT fund has returned 5.8 percent a year since 2001, making it Europe’s best-performing euro-denominated government bond fund with more than 500 million euros of assets over the past three, five and 10 years, according to Morningstar Inc. Competitors at Aegon NV and Natixis SA say there are less risky ways to profit from Europe’s sovereign debt crisis.

Greek Rebound

Greek bonds returned 12 percent in a month after Standard & Poor’s slashed the country’s rating three steps to BB+, the top non-investment grade, on April 27, 2010, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Greek debt is today rated CCC, the lowest rating of any government in Europe.

Irish bonds are rated BBB+ by S&P, three steps above junk status, while Portuguese bonds, which still has an investment-grade BBB- rating with S&P, were cut to Ba2 with negative outlook by Moody’s. Portuguese bonds lost 8.1 percent last year, their worst performance since at least 1994. Ireland declined 14.2 percent, the biggest drop since Bloomberg started compiling data in 1993.

Steverink said he prefers Irish bonds to Portuguese because the country’s debt burden was caused by the banks. The country doesn’t have the “structural problems” of southern Europe’s economies, he said. Ireland also has more potential to export its way out of trouble, he said.

Aegon, Natixis

Ina Goedhart, Steverink’s colleague, said yesterday the fund would wait at least a month before buying Portuguese bonds because during that time there will be many forced sellers who can’t hold junk bonds.

Erik Leseman, who runs Aegon’s Euro AAA Bond fund in The Hague, and Olivier De Larouziere, who manages Paris-based Natixis Asset Management’s Souverains Euro fund, disagree with the Delta Lloyd managers, saying the core euro-area countries such as Germany are safer investments.

Leseman, 39, who helps manage 20 billion euros for Aegon, aims to profit by using derivatives to bet on an increase in yields from shorter-dated German bonds. His Aegon Euro AAA Bond fund can only invest in triple-A rated debt.

“Market sentiment about the periphery is a strong driver of flight to quality, which influences the short end of the German curve,” he said. “We’re seeing it flow out of the core in the last week and we think that will continue. That’s why we are positioned for higher short-term rates in Germany.”

‘Very Volatile’

Leseman’s Aegon Euro AAA Bond fund, which has 1.9 billion euros of assets, has returned 4.4 percent annually for the last five years, putting it second only to the Delta Lloyd fund, according to Chicago-based Morningstar.

“Sentiment is very volatile at the moment,” Leseman said. “It’s going up and down every few weeks when a deadline comes up for one of these periphery countries. One of the main things I’m looking at right now is what’s coming out of the mouths of the Irish and Portuguese politicians.”

Ireland followed Greece and sought a rescue seven months ago to inject money into its debt-laden financial system and cover day-to-day spending rather than paying back maturing debt. Ireland’s budget deficit widened to 10.8 billion euros in the six months to June from 8.9 billion euros a year earlier, according to the Finance Ministry.

‘Always Difficult’

Portugal received 78 billion euros from the European Union and the International Monetary Fund in May. Moody’s cut the country’s credit rating to below investment grade on concern the country will seek another bailout. The bond investors are also skeptical Portugal will be able to cut spending, boost productivity and revenue.

De Larouziere, whose Natixis Souverains Euro fund is Europe’s sixth-best performing European government bond fund with more than 500 million euros of assets over the last decade, says it’s too early to be buying debt of euro-peripheral countries such as Portugal.

“This downgrade seemed inevitable, but the market timing is always difficult,” he said. “With Portugal now being rated in the high-yield category, many investors with rating constraints will be forced to sell positions. It is still too early to even consider changing our view.”

De Larouziere, who owns no Portuguese debt, holds nine-month money-market investments in Ireland and is selling medium-term Spanish bonds.

‘Too Positive’

“Spain has made great efforts in terms of communication to the market, which has been received very positively,” said De Larouziere, 43. “We think this is too positive if you consider how systemically risky the country is. It will be much more difficult for the institutions to deal with a Spanish crisis.”

De Larouziere’s 500 million-euro fund has returned 4.5 percent annually for the last 10 years, compared with his peer group average of 3.96 percent, according to Morningstar.

His favored holdings are German, French and Italian debt “on the longer end of the curve” because of their liquidity. He also owns Austrian and Dutch debt, he said.

One point that all three managers agree on is that turmoil in Greece won’t break up the euro zone. In fact, it may force the region to form closer political and fiscal ties, they said.

“We are talking today about maybe the common minister of finance for the euro zone,” De Larouziere said. “This would have been unthinkable only a few months ago. We created new Eurobonds. That was unthinkable as well. A United States of Europe is a real possibility.”

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