Pacific Investment Management Co. and BlackRock Inc. are among U.S. investors buying up bank bonds in Europe’s most indebted nations as central-bank chief Mario Draghi wins back the confidence of the world’s biggest money managers.
Pimco’s $2.9 billion exchange-traded fund boosted the proportion of its corporate-debt holdings by almost 8 percentage points in three weeks by adding notes of lenders from Spain’s Banco Santander SA to Italy’s Intesa Sanpaolo SpA, data compiled by Bloomberg show. BlackRock added to its Santander holdings in the period while AllianceBernstein LP increased its allocation to bonds of Spanish lender Banco Bilbao Vizcaya Argentaria SA.
Draghi’s pledge that the European Central Bank will do “whatever it takes” to save the euro is leading the region’s bank bonds to the longest winning streak over American counterparts in six months. Test results showing the stress in Spain’s banking system was less than estimated in June is fueling the biggest outperformance in the euro debt of that nation’s lenders in eight months.
“There are many European banks that have solid balance sheets, assuming there isn’t a breakup of the euro zone,” said Ashish Shah, the head of global credit investments at New York-based AllianceBernstein, which oversees $230 billion in fixed-income assets. “What Draghi’s done a good job of is reducing the perception of tail risk around Europe.”
Debt from Italian and Spanish banks rallied the most among financial debt globally last month, gaining 3.8 percent and 2.7 percent, as Draghi announced a plan on Sept. 6 to buy unlimited quantities of short-dated government bonds of nations that signed up for rescues.
Turin-based Intesa Sanpaolo and Milan-based UniCredit SpA led last month’s 1.4 percent gain on bank debt globally, Bank of America Merrill Lynch index data show. In the three months ended June, losses of about 3.9 percent on the bonds of Italian lenders and 5.5 percent for Spanish banks pared returns on the global index to 1.1 percent.
Draghi has shown a greater willingness than predecessor Jean-Claude Trichet to use the ECB’s money to aid Spain and Italy, with the central bank’s balance sheet expanding by 745 billion euros ($963 billion) since he took over in November.
“Anybody who was worried about the euro breaking up, Draghi sort of took that risk off for many people,” said Michael Shemi, a director at Christofferson, Robb & Co., a New York-based investment firm with about $1.7 billion under management. “That’s what made people say look, where can I get good current income and capital appreciation.”
Elsewhere in credit markets, Wellpoint Inc., the biggest U.S. health insurer behind UnitedHealth Group Inc., sold its first convertible securities in more than 13 years with a $1.35 billion offering of 30-year bonds. MetroPCS Communications Inc. bonds rose to a record after Deutsche Telekom AG said it would combine the company with its T-Mobile USA unit.
The U.S. two-year interest-rate swap spread, a measure of debt-market stress, fell for the fourth time in five days, declining 1.44 basis points to 13.06 basis points. The gauge, which reached a more than two-year low of 12.31 on Sept. 14, narrows when investors favor assets such as company debentures and widens when they seek the perceived safety of government securities.
The Markit CDX North America Investment-Grade index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell to the lowest in more than a week, dropping 1.7 basis points to 96.6 basis points, according to prices compiled by Bloomberg.
In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 3.3 to 129.
Both indexes typically fall as investor confidence improves and rise as it deteriorates. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million.
Bonds of Banco do Brasil SA, Latin America’s largest lender by assets, were the most actively traded dollar-denominated corporate securities by dealers today, with 124 trades of $1 million or more as of 11:52 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The Brasilia-based bank sold a record $1.75 billion of 10-year bonds yesterday, eclipsing previous offerings of $1.5 billion in 2011 and 2009, data compiled by Bloomberg show. The new debt climbed 1 cent from the issue price to 99.95 cents on the dollar to yield 3.9 percent at 11:34 a.m. in New York, Trace data show.
Wellpoint, the operator of the Blue Cross and Blue Shield insurance plans issued 2.75 percent debt with a conversion price of $75.57 per share, according to data compiled by Bloomberg. The shares traded at $60.45 at 11:46 a.m. in New York.
MetroPCS’s $1 billion of 6.625 percent notes due November 2020 rose 1.1 cents to 110.1 cents on the dollar to yield 5.1 percent at 11:06 a.m. in New York, Trace data show. The bonds traded as high as 111.6 cents, compared with 105.6 on Oct. 1, the day before Bloomberg News first reported discussions between the companies.
Pimco’s Total Return ETF more than tripled the proportion of its Santander bonds last month, increasing its allocation to the debt to 1.04 percent of its portfolio in the three weeks ended Sept. 28, according to holdings data compiled by Bloomberg.
The fund, managed by Bill Gross purchased the firm’s 3.72 percent bonds that mature in 2015, among other offerings from Spain’s biggest bank. Those notes have increased by 5.3 cents since the end of July, to 99.8 cents on the dollar, Trace data show.
The ETF, which opened on Feb. 29 and follows a similar strategy to Newport Beach, California-based Pimco’s flagship mutual fund, the world’s biggest, attracted about $338 million of deposits in September, Bloomberg data show. Mark Porterfield, a spokesman for the money manager, which oversaw $1.82 trillion of assets as of June 30, declined to comment.
BlackRock’s $3 billion Total Return Fund bought Santander’s 3.25 percent bonds due in 2015 and 4.125 percent bonds due in January 2017, Bloomberg data show. It also boosted its holdings of bonds from London-based Lloyds Banking Group Plc and HSBC Holdings Plc. BlackRock, based in New York, managed $3.56 trillion at the end of June.
“We still believe that there is implementation risk in Europe, yet valuations are attractive,” Rick Rieder, BlackRock’s chief investment officer of fundamental fixed income, said in an e-mail. Italy’s efforts toward achieving more fiscal responsibility “makes this one of the names that we are most comfortable with.”
Last month, AllianceBernstein’s $5 billion High Income Fund purchased BBVA’s 5.919 percent bonds due in April 2049 and added to its holdings of debt from BNP Paribas SA, France’s largest bank, according to Bloomberg data.
“The Fed and the ECB have really eased funding concerns around European as well as U.S. banks,” AllianceBernstein’s Shah said. “People can really center in on solvency.”
The ECB announced efforts to cut borrowing costs and stimulate growth in the region the same month that Federal Reserve Chairman Ben S. Bernanke committed to buying $40 billion of mortgage bonds a month to bolster growth in a third and open-ended round of so-called quantitative easing.
The central bank also said it expects to keep its target interest rate, held between zero and 0.25 percent since December 2008, at record-low levels through mid-2015.
While Trichet kept the ECB from propping up debt-laden governments by limiting purchases of their securities, Draghi announced an agreement on Sept. 6 for an unlimited bond-buying program to tamp down interest rates and fight speculation of a currency breakup.
Europe’s central bank also held its benchmark rate at a record low 0.75 percent as it forecasted a deeper economic contraction for 2012 than it did three months earlier. Euro-area gross domestic product will decline 0.4 percent this year instead of 0.1 percent, it said.
“Our sovereign analysts have become more sanguine on the eurozone following the ECB’s recent efforts to help preserve the currency union,” T. Rowe Price Group Inc. portfolio managers Steven Huber and David Stanley wrote in a report distributed yesterday.
“We selectively added to our euro corporate allocation in our global multi-sector portfolios, including small positions in short-term debt from Italian and Spanish companies,” they said in the report.
Spain’s banks have a capital deficit of 59.3 billion euros, stress tests conducted by New York-based management consultancy Oliver Wyman showed last weekend. That was less than the 62 billion euros Wyman estimated in June that the lenders would need.
Bonds of Intesa Sanpaolo, Italy’s second-biggest bank, rose 5.2 percent in September, while notes from UniCredit, the nation’s largest bank, gained 4.4 percent, according to Bank of America Merrill Lynch’s global corporate banking index.
Investors have bid up financial debt prices globally, leading to 11.4 percent returns this year as banks boost their capital reserves to meet minimum requirements set out by the 27-country Basel Committee on Banking Supervision. In the U.S., the Dodd-Frank Act’s Volcker Rule seeks to limit risk-taking at the biggest financial institutions.
“Regulatory rules are going to force banks to be better capitalized and have better quality of capital,” Christofferson Robb’s Shemi said. “They’ll be less leveraged than in the past.”