Standard Life Investments, Edinburgh’s largest money manager, expects the euro to extend its decline because the European Central Bank will eventually drop its objection to stepping up bond purchases.
ECB policy makers are under pressure from politicians and investors to do more to stabilize markets while European leaders seek a longer-term solution involving tighter budget rules. The central bank, which started buying Spanish and Italian bonds in the second half of this year, may relent should the countries struggle to find buyers for their debt next year, said Jack Kelly, investment director at Standard Life.
“Many taboos have been broken already in Europe in the last 18 months,” Kelly, who helps manage about 3.5 billion euros ($4.6 billion) in European government bonds, said at the company’s office in the Scottish capital on Dec. 13, a day before the euro fell below $1.30 for the first time since January. “If auctions were to perform particularly poorly, the likelihood of greater ECB involvement would increase.”
The ECB needs to play a greater role in solving the region’s debt crisis, Irish Prime Minister Enda Kenny said on Nov. 30, adding that even countries with “unquestionably sound finances” are being tested. The central bank has resisted calls to backstop the currency bloc, saying it’s up to governments to sort out the crisis and that rescuing states would compromise its independence and credibility, while fueling inflation.
Europe’s 17-nation currency gained 0.4 percent to $1.3060 as of 2:06 p.m. London time, leaving it 2.5 percent lower in the week, the biggest decline since the five days through Nov. 4.
“One of the key trades and strategies we have on is to be underweight the currency,” Kelly said. “If you analyze the various scenarios in Europe, good or bad, the euro should come under some sustained pressure.”
Standard Life’s 131 million-euro Euro-zone Government Bond Fund, which can also hold a proportion of its assets outside the euro region, declined 0.5 percent in the year to Sept. 30, according to the company’s website. Its largest four holdings at that time were Swedish, U.K., French and Italian bonds.
Citigroup Inc. estimates Spain and Italy need to sell 20 billion euros of debt in January.
While Italy paid the highest rate since 1997 at an auction of securities due in five years this week, Spain sold 6.03 billion euros of debt, almost twice its maximum target.
Borrowing costs on the Spanish offering of five-year paper yesterday dropped to 4.023 percent from 5.276 percent on similar maturity auctioned on Dec. 1. Bonds due in 2020 were sold at a higher rate, yielding an average 5.239 percent, compared with 5.006 percent in September. The U.K. sold 2017 securities at 1.125 percent yesterday.
The euro may drop to as low as $1.20 in the first half of 2012, Ken Dickson, investment director of currencies at Standard Life, said last week. He cited the possibility of more interest-rate cuts by the ECB, after it lowered the refinancing rate twice since November to 1 percent.
In addition to its stance on the euro, Standard Life is unlikely to invest Europe’s so-called peripheral bond markets until its sees signs of governments moving toward issuing common bonds or the ECB increasing bond purchases, Kelly said.
Standard Life prefers “fiscally strong countries with high ratings,” including Australia and Norway, while U.S. Treasuries will benefit from their status as a haven in times of turmoil, Kelly said. Within Europe, Standard Life was still “constructive” on Germany, as demand is likely to be supported by slowing growth in the euro area, he said.