March 5 (Bloomberg) -- European bond investors from Lazard Asset Management and Pioneer Investments recommend investing in Italian and Spanish government debt this year, betting the European Central Bank’s backstop will encourage prices to rise.
“It’s risk-on with regard to peripheral bond markets,” Christian Eckert, head of European fixed income at Lazard, which oversees the equivalent of $9.7 billion, said today at the Euromoney Bond Investors Congress in London.
Italy’s 10-year government bond yields have jumped almost 70 basis points since reaching 4.07 percent, the lowest in more that two years, on Jan. 25, as inconclusive elections threatened to derail austerity measures designed to control the nation’s debt and counter Europe’s financial crisis. They’re still about 2 percentage points lower than they were in July, before ECB President Mario Draghi pledged to do “whatever it takes” to hold the euro area together.
Glenn Hadden, head of European fixed income at Morgan Stanley, told the conference that he favors “investing in the policy” of the ECB to drive down the yields of the region’s peripheral debt.
ECB President Mario Draghi gave full details on Sept. 6 of his plan to buy sovereign bonds if a member nation requests help and signs up to economic reforms. So far, no country has asked for the support.
At 5.04 percent as of 4:53 p.m. London time, Spain’s 10-year bonds yield 359 basis points more than benchmark German bunds.
“The risk premium on peripherals is very competitive,” said Cosimo Marasciulo, head of government bonds and currencies at Pioneer, which oversees 156 billion euros ($203 billion). Buying the bonds of the nations is a “compelling” trade, though investors need to be wary of volatility, he said.
“Central banks are being supportive of markets, trying to force people in to riskier markets,” Marasciulo said.
The additional yield, or spread, investors demand to hold Italian 10-year bonds over German bunds fell 18 basis points to 328 basis points today. It was at 288 basis points on Feb. 22, the last trading day before Italy’s inconclusive elections.
Goldman Sachs Group Inc. expects euro-area yield spreads to tighten this year, favoring Spanish bonds over their Italian counterparts.
“We do not expect the Italian electoral outcome to invalidate this overall strategy,” strategists Francesco Garzarelli and Silvia Ardagna wrote in an e-mailed note today. “We see spreads eventually settling back into a pre-election range.”
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