Morgan Stanley Backs Off Italian Bond Stance With QE Days Away

Morgan Stanley is going cold on some of the euro-area’s higher-yielding debt, one day before the European Central Bank may give details on its plans to purchase the region’s securities in quantitative easing.

Concerned that the consensus opinion on these holdings is now excessive, Morgan Stanley fixed-income strategist Anthony O’Brien proposes ending a bet that Italian bond futures will advance. He also favors hedging a holding that would prosper if Portuguese securities gain, by taking an opposite position in Italian debt. To O’Brien, the popularity some euro-area trades may be limiting potential gains.

Longer-dated peripheral bonds have benefited the most since ECB President Mario Draghi announced the 1.1 trillion-euro ($1.2 trillion) program to buy private and public securities in January. Portugal’s 10-year yield dropped to a record low 1.739 percent on Monday while the extra premium investors demand to hold Italian bonds over German bunds narrowed to the least in almost five years on the same day.

“Perhaps it is better to travel, than to arrive,” O’Brien, who is based in London, wrote in a client note Wednesday. “Although the periphery generally rallies on the actual day of the meeting, we are not expecting any positive surprises from President Draghi on this occasion.”

Fourteen of 20 banks surveyed by Bloomberg News said Portugal was one of their top picks as the country that would benefit the most from QE. With the ECB planning to buy debt maturing in as many as 30 years, longer-maturity bonds were another area of strategist consensus.

The ECB’s Governing Council is scheduled to meet in Cyprus on Thursday.

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