Carmignac Sees Politics, Not Brexit, as Problem for Peripherals

  • Voting seen as risk for Spanish, Italian government bonds
  • Money manager reduced holdings of peripheral debt since 2013

It’s domestic politics, not concern that the U.K. will vote to leave the European Union, that’s making Spanish and Italian government bonds less attractive, according to Carmignac.

The Paris-based money manager, which oversees about 51 billion euros ($58 billion) in assets, has reduced its holdings of peripheral euro-area government securities to a third of that it owned three years ago. Votes in Spain this month and Italy in October, along with the European Central Bank’s bond-buying program approaching its planned end-date, are major risks to sovereign securities, according to Sandra Crowl, a member of Carmignac’s investment committee.

Spanish 10-year government bonds rose earlier Thursday, pushing the yield to the lowest level in three months. The yield on benchmark German 10-year bunds fell to a record.

“What is really the medium-term influence on peripheral bonds is the asset-purchasing program of the ECB and the potential political risk that we’ll be running into late June in Spain and the referendum in Italy,” Crowl said in an interview in London Wednesday.

‘End Stage’

“We have reached a decent value” in peripheral positions, Crowl said. “We feel that the asset-purchasing program is reaching an end stage whereby the ECB is buying as much as they possibly can,” she said.

The ECB in March expanded its monthly bond-buying program to 80 billion euros and extended its planned end-date by six months to March 2017.

Spain’s 10-year bond yield was little changed at 1.43 percent as of 4:19 p.m. London time, after falling to 1.39 percent, the lowest level since March 10. The price of the 1.95 percent bond due in April 2026 was 104.75 percent of face value. The yield fell nine basis points, or 0.09 percentage point, in the previous two days.

The yield on similar-maturity Italian debt was little changed at 1.39 percent. The extra yield, or spread, investors demand to hold Spanish 10-year bonds instead of Italian securities shrank to 3.6 basis points Wednesday, the lowest since July based on closing prices.

Analysts have said that should the U.K. vote to leave the 28-nation bloc, that may hurt lower-rated European nations as the perceived risk that the euro breaks up increases. With those countries already facing political challenges, that’s helped boost demand for the region’s benchmark sovereign securities.

Record Yield

German 10-year bund yields fell one basis point to 0.04 percent after sliding to 0.023 percent, the lowest since Bloomberg began tracking the data in 1989.

Spain’s general election on June 26, its second in less than six months, threatens to be inconclusive again, according to polls. A referendum in Italy in October may test Prime Minister Matteo Renzi’s so-far solid backing.

Carmignac expects that the next governments in the region will be “weak compositions” given the rise of anti-establishment parties, adding to the risk to these nations’ sovereign debt. “These are the more important medium-term risks that we look at as investors,” with Brexit being “a short-term” vulnerability, Crowl said.

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