As the rally in bonds from the euro area’s most-indebted nations pushes yields to all-time lows, Pioneer Global Investments Ltd.’s Cosimo Marasciulo says this “is as good as it gets” for peripheral securities.
“Positive total returns across the market, low volatility, usually these kind of very benign market conditions do not last long,” Marasciulo, who helps to oversee about $253 billion as head of European government bonds in Dublin, said in a phone interview on Aug. 12. “There’s always a trigger that changes the overall picture.”
Borrowing costs from Ireland to Italy fell to all-time lows today along with Germany’s 10-year yield as Ukraine said its troops attacked an armed convoy that had crossed the border from Russian territory. The German yield dropped below 1 percent yesterday for the first time as data showed Europe’s largest economy shrank more in the second quarter than analysts forecast, increasing bets on further action from the European Central Bank to spur prices.
The rally has been led by bonds from Europe’s most-indebted nations, which were shunned by investors at the height of the sovereign debt crisis. Spain’s 10-year yields are about one-third of their 2012 peak, while Italian, Spanish, Portuguese and Greek bonds have returned more than 10 percent this year through yesterday, Bloomberg World Bond Indexes show.
Italy’s 10-year bonds climbed a sixth day, pushing the yield down six basis points, or 0.06 percentage point, to 2.59 percent at 4:20 p.m. London time after reaching 2.577 percent, the lowest since Bloomberg began compiling data on the securities from 1993. The 3.75 percent bond due in September 2024 rose 0.585, or 5.85 euros per 1,000-euro ($1,339) face amount, to 110.31.
The rate on equivalent Spanish debt dropped to 2.383 percent, also the least on record, as government bonds across the euro bloc headed for a weekly advance amid faltering growth and bets inflation will remain subdued.
The extent of the rally means the market is already pricing in the positive story in the periphery, leaving Pioneer looking for opportunities to reduce its holdings, Marasciulo said.
“We think that most of the rally is behind us,” he said. “We are neutral. If we see a catalyst we may consider an underweight” position, Marasciulo said.
Underweight means that a fund holds fewer of the securities than recommended by the benchmark it uses to track performance.
Pioneer is not alone in seeing the surge in European bonds coming to an end. Goldman Sachs Group Inc. strategists last week said they didn’t expect any further narrowing in periphery yield spreads over benchmark German securities, while Francesco Garzarelli, the firm’s co-head of macro and markets research, said in a Bloomberg TV interview on Aug. 13 that German bund yields may double by the end of 2015.
Fidelity Worldwide Investment Ltd., which manages about $290 billion, said it has been reducing its holdings in peripheral euro-area debt.
“We’ve been in aggregate peripheral bond exposure and those spreads feel as though they’ve gone as far as they are going to go,” Trevor Greetham, director of asset allocation at Fidelity, told Manus Cranny on Bloomberg’s Television’s “Countdown” today. “I’ve been trimming back into bunds. It seems rather weird that yields are dipping below 1 percent and we’re buying, but we’re just moving out of other government bonds in Europe where it feels like they’ve gone too low.”
German securities have been supported as conflict from Ukraine to Iraq boosted demand for the euro region’s safest assets. The 10-year bund yield fell four basis points to 0.97 percent today and touched 0.96 percent, the least since Bloomberg began tracking the data in 1989.
“With the 10-year bund yield at this level, it does not take a lot to lose money,” Pioneer’s Marasciulo said. “Even a pick-up in yield of say 15 basis points would really wipe out all your annual return.”