Spanish and Italian bonds are more attractive than U.S., German and French securities with European leaders likely to prevent the region’s sovereign-debt crisis from worsening, according to Brandywine Global Investment Management’s Stephen Smith.
“We are overweight Italy and Spain,” Smith, lead portfolio manager in Philadelphia at Brandywine, which oversees $40 billion of debt, said at an investor round-table discussion in New York hosted by American Beacon Advisors.
Brandywine sees European Central Bank President Mario Draghi’s comments on Aug. 2 that “the euro is irreversible” as a turning point in the crisis that started in 2009 in Greece, Portugal and Ireland and spread to Spain and Italy.
Spanish and Italian 10-year bond yields have fallen since Draghi’s pledge, with Spain’s 10-year yield dropping 147 basis points, or 1.47 percentage points, to 5.69 percent, and comparable Italian debt sliding 140 basis points to 4.92 percent. At the same time, yields on German bunds and Treasuries have risen from close to record lows.
European policy makers agreed Sept. 6 on an unlimited bond-purchase program aimed at regaining control of interest rates in the euro area and fighting speculation of a breakup of the single currency. The purchases will be fully sterilized, meaning that the overall impact on the money supply will be neutral.
“It’s been rough,” Smith said, “but, for policy makers, self-preservation will win out.”