Italian Bonds Lure Danish Cash as Spain Seen Too RiskyChristian Wienberg
As Danish pension savings flow into Italian government bonds to boost returns, Spain is becoming too risky a bet even for money managers hungry for yield, according to one of the Scandinavian nation’s biggest investors.
Sampension, which oversees about $36 billion in assets, “significantly” increased its holdings of Italian bonds in the middle of 2012, Kasper Ullegaard, who heads the Copenhagen-based fund’s fixed-income unit, said in an interview. While the investor has sold its Spanish bonds, it’s holding on to its Italian securities, he said.
Ullegaard is betting that Italian bonds will extend last year’s rally while Spanish debt has probably passed its peak. The investment strategy reflects an assumption that the euro area’s third- and fourth-largest economies are on divergent paths underpinned by different fiscal outlooks.
Italy’s budget deficit will narrow to 2.1 percent of gross domestic product this year from 2.9 percent in 2012, the European Commission said on Nov. 7. While Spain’s public finances will improve, the deficit will be 6 percent this year, still double the 3 percent limit euro members are required to stay within, according to the commission’s November estimates.
The yield spread between Italian and Spanish 10-year debt widened today for the first time in a week to 83 basis points from 81 basis points on Feb. 8. Five-year credit default swaps, which show the cost of insuring against non-payment, rose six basis points for Spanish debt, compared with three basis points for Italian bonds, according to data available on Bloomberg.
The yield on benchmark 10-year Italian debt eased to 4.55 percent at the end of last week, from a high of 7.3 percent on July 25, one day before European Central Bank President Mario Draghi’s pledge to do whatever it takes to save the euro. Yields on similar-maturity Spanish bonds eased to 5.36 percent at the end of last week, from a high of 7.6 percent on July 24.
Spain’s economy contracted 0.7 percent in the final three months of last year from the previous quarter, when it shrank 0.3 percent, according to official figures. The nation’s declining economic prospects are exacerbating government efforts to rein in its finances as it grapples with the euro area’s highest unemployment rate.
Spanish joblessness was 26.1 percent in December, compared with 11.2 percent in Italy and an average of 11.7 percent in the single currency bloc, Luxembourg-based Eurostat said on Feb. 1.
“There’s still more value potential in Italian bonds,” Ullegard said. “The bonds are more volatile than some of the other government bonds out there, but the premium you get from owning them will more than make up for that volatility.”
Italian bonds with maturities longer than one year returned 21 percent last year, the most since 1996, according to Bloomberg/EFFAS indexes. Spanish bonds returned 6 percent. This year, Italian debt has delivered investors 0.5 percent, compared with 0.9 percent on Spanish bonds. Government bonds sold out of Sampension’s home market, Denmark, are the world’s worst-performing debt class so far in 2013, having lost investors 2.3 percent. The returns are measured in local currencies.
“The reason why we’ve chosen to take home profit on some of our Spanish bonds is that we don’t think Spain has the same level of long-term support from good fundamentals,” Ullegaard said.
Sampension last year sold Danish government bonds as it moved into southern European debt. That shift has so far earned the fund a profit of about 1 billion kroner ($181 million), or 700 million kroner more than a similar investment in Danish notes would have yielded, according to Ullegaard.
Italy still faces political hurdles. Former Prime Minister Silvio Berlusconi has been narrowing the lead of front-runner Pier Luigi Bersani in opinion polls up to Feb. 24-25 elections. Berlusconi has been spooking bond investors amid pledges to cut taxes and end a levy on first homes implemented by Prime Minister Mario Monti.
Still, risks related to the outcome of the elections are limited, according to Ullegaard.
“A lot of Italian bonds are owned by local financial institutions, so it wouldn’t be politically wise to cause some sort of value deduction, because it would destroy the home market,” he said.
The euro area’s crisis isn’t yet over and “there may be a risk of some sort of meltdown for other government bonds out there, but much less so for Italy,” Ullegaard said. “Any potential change for the worse would happen in small steps over time, which would allow us to exit in a reasonably calm and orderly fashion.”