Yesterday’s ‘PIIGS’ Are Today’s Darlings as Peripherals Evade Slump

Updated on
  • Spain auctions 2066 securities at lower yield than in June
  • Aberdeen Standard Investments still sees risks in fringe debt

The selloff in credit has cast a flattering light on Europe’s periphery.

Even with other risk assets in the throes of retreat this week, investors are finding reason to buy government bonds on the fringe of Europe. As yields of peripheral-nation and corporate debt begin to splinter, Spain sold 2.2 billion euros ($2.6 billion) of its longest-term debt due in 2066 at a lower yield than in its June auction, and with a larger ratio of bidders to supply.

Portugal, Italy, Ireland, Greece and Spain -- crassly dubbed PIIGS back in 2010 -- were close to the center of the euro crisis that resulted in European Union member states using almost 2 trillion euros ($2.4 trillion) to prop up lenders.

They’ve since tackled the worst of their debt problems while growth has returned. European Central Bank President Mario Draghi’s now-famous pledge to “do whatever it takes” drove off speculators betting against the euro by arresting soaring bond yields in peripheral nations. The ECB continued to sound dovish at its last meeting.

It’s “noticeable the way peripheral bond markets are behaving in the generally risk-off environment, largely ignoring the deterioration in risk sentiment elsewhere,” Societe Generale SA strategists led by Kit Juckes wrote in a note to clients. “Fullish government coffers starve the market of bonds and peripheral spreads decouple from the wider mood.”

To be sure, even if it avoids getting caught up in the credit selloff, the euro-region’s fringe still bears economic and political risks, as seen in the separatist revolt last month in Spain’s Catalonia region that still simmers. After a three-year hiatus, Greece only returned to the bond markets in July and still relies on euro-area creditors and the International Monetary Fund.

“The sovereign crisis of 2010-2011 is well behind us and PIIGS is certainly not a basket to trade anymore,” Luke Hickmore, senior investment manager at Aberdeen Standard Investments in Edinburgh said Wednesday. “Peripherals are still a risk asset though.”

— With assistance by Paul Dobson

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