Aletti’s Biggest Bet Is Positive on Europe’s Peripheral Bonds

  • Italy-Germany 10-year yield gap seen narrowing to 100 bps
  • December Fed rate increase will help spread tighten: Fiorini

Growing political uncertainty and banking crises in the euro area haven’t scared yield-hungry investors away from the region’s riskier government bonds.

With the European Central Bank’s asset-purchase program firmly in place, Aletti Gestielle SGR SpA chief investment officer Fabrizio Fiorini remains in favor of sovereign bonds from peripheral countries such as Italy and Spain over those from higher-rated Germany.

Italian Prime Minister Matteo Renzi’s fate hangs on a constitutional referendum slated for later this year, while Spain is struggling to form a stable government even after two general elections since December.

Milan-based Fiorini, who’s company manages 16.5 billion euros ($18.6 billion), predicts the yield spread between Italian 10-year securities and benchmark German bunds will narrow to levels last seen in January. According to Fiorini, stabilization of the economic condition in Europe alongside the ECB’s stimulus shield will help support peripheral debt, while tighter monetary policy from the Federal Reserve will weigh on safer assets such as German bunds.

‘Long Peripherals’

“My biggest position is long peripherals against core,” Fiorini said. “In this very uncertain environment, the only certainty is that the spread will narrow. The spread can do very well in any environment because of the certainty that the ECB will continue with easing.”

A long position is a bet an asset’s price will increase.

Italy’s 10-year bond yield was little changed at 1.13 percent as of 4 p.m. London time. The price of the 1.6 percent security due in June 2026 was 104.38 percent of face value. The yield on similar-maturity German increased one basis point, or 0.01 percentage point, to minus 0.075 percent. That left the spread between the securities at 120 basis points.

Fiorini predicts that the spread will tighten to 100 basis points by year-end, a level last reached on Jan. 15. He forecasts the Fed will increase U.S. interest rates in December, which will push up Treasury yields and help drive those on German bunds toward 0.2 percent by early 2017.

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