BlackRock Ties Wager on Periphery Bonds to ECB Buffering Turmoil

  • Spread compression to resume on ECB’s stimulus program: Watson
  • Spanish bonds recover earlier losses to lead region higher

With European Central Bank President Mario Draghi mounting a defense of the institution’s extraordinary stimulus this week, the world’s largest fund manager is betting on a resurgence among the region’s higher-yielding sovereign-debt securities.

While Portugal is approaching a review of its only investment-grade rating on Oct. 21 and Italy prepares to announce a date for a political-reform vote that may topple its prime minister, BlackRock Inc. says “short-term risks” and “political noise” will pass and be countered by the central bank. Addressing addressing lawmakers in Brussels Monday, Draghi reaffirmed officials’ commitment to provide stimulus as they deem needed.

The search for alternatives to near- and below-zero yields in the region’s top-rated bond markets also underpins the securities, the fund manager says. While the ECB disappointed investors after its meeting this month by not signaling an imminent plan to extend stimulus, it’s still buying 80 billion euros ($90 billion) of euro-area securities a month.

BlackRock is comfortable owning Italian bonds, and even sees value in Portugal and Greece for those willing to ride out short-term volatility, according to Marilyn Watson, the company’s global bond strategist.

‘Political Noise’

“There are a lot of short-term risks and a lot of political noise that we have to get through over the next few months, but certainly over the medium-term horizon we think that peripheral Europe still has a lot to offer, and we will continue to see spread compression,” Watson said in a Bloomberg Television interview with Guy Johnson in London.

Bonds of lower-rated bonds offer value if “you’re prepared to take the volatility” and hold on to them in a scenario in where core nations are offering “nothing, or negative yields,” she said.

Spanish 10-year bond yields fell five basis points, or 0.05 percentage point, to 0.92 percent as of 3:58 p.m. London time. The 1.95 percent security due in April 2026 rose 0.47, or 4.70 euros per 1,000-euro ($1,125) face amount, to 109.43. The yield rose to as high as 0.99 percent earlier Monday, the most since Sept. 21.

German Pressure

Draghi is also due to address a closed-door session of German lawmakers on Wednesday, where he may seek to reassure investors that the ECB is ready to do more to help the economy and boost inflation if needed.

German Finance Minister Wolfgang Schaeuble told lawmakers in the Bundestag to push the central bank chief to defend its low interest rates, Bild newspaper reported over the weekend. Schaeuble has criticized the extraordinary monetary measures under Draghi, saying low rates have squeezed savings for Germans and created excessive liquidity in markets.

Yields on benchmark German 10-year bunds fell three basis points to minus 0.11 percent, as the spread with similar-maturity Spanish securities compressed to 103 basis points, from earlier as wide as 109 basis points, the most since Sept. 12. The yield on Italian 10-year bonds dropped three basis points to 1.19 percent, leaving the spread to bunds at 130 basis points.

The People’s Party of Spanish acting premier Rajoy claimed 41 of the 75 seats in Galicia’s regional assembly while his main rivals at the national level, the Socialists, suffered losses in the region, according to data released by the local administration. In a separate election in Spain’s Basque Country, the PP held on to nine of its 10 seats.

“There is that feeling that the Socialists will be weaker following this result,” strengthening the hand of Rajoy’s party, “who are a known quantity to the market, are more right of center and generally more market friendly,” said Orlando Green, a rates strategist at Credit Agricole SA’s corporate- and investment-banking business in London. “I wouldn’t say yesterday’s elections should have done Spanish bonds any harm.”

— With assistance by Guy Johnson

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