Europe’s debt frenzy undeterred by record recession
Investors are snapping up long-dated bonds from Europe’s high debt and deficit nations even as prices reach the most expensive levels since 2010 and the region’s deepening recession threatens to hamper deficit-reduction plans.
Bonds maturing in more than 10 years from Greece, Spain, Portugal, Italy and Ireland are the best performers in the world this quarter as a safety-net pledge by the European Central Bank and bond buying from the Federal Reserve and Bank of Japan bolsters demand for higher-yielding assets. The rally gave governments from Italy to Spain confidence to sell longer-dated debt, even as Pacific Investment Management Co. said it’s avoiding the securities on concern about the outlook.
“At the moment, the power of monetary policy and the hunt for yields are outweighing the growth factors,” said Joost van Leenders, who helps oversee $657 billion as a strategist at BNP Paribas Investment Partners in Amsterdam. “We are not sure how much patience the markets have. Growth prospects in Europe are really a problem and a risk for government finances, so we don’t see that as positive for markets. The rally has gone a bit too far.”
BNP Paribas is underweight peripheral bonds relative to safer assets like those from Germany and the Netherlands, said van Leenders, meaning the bank’s funds hold fewer securities than the benchmark used to track performance.
Italy’s 30-year bond yield fell four basis points to 4.68 percent at 10:28 a.m. London time. The rate has fallen from 5.07 percent at the start of the year and reached 4.57 percent on May 3, the lowest level since 2007. Spain’s 30-year yield is 4.86 percent, down from 5.75 percent at the start of the year, while Portugal’s has slipped to 5.82 percent from more than 7 percent.
Spanish, Italian and Portuguese securities of all maturities are rallying as central banks around the world inject funds into financial markets and cut interest rates to spur growth and stave off the risk of deflation.
Investors bid for more than three times the number of securities available at Portugal’s sale of junk-rated 10-year notes via banks on May 7, the first securities of that maturity since the government sought a bailout in April 2011. Italy sold new benchmark 30-year bonds on May 15 for the first time since September 2009, while Spain sold 7 billion euros ($9 billion) of 10-year notes through banks on May 14.
About 37 billion euros of euro-region bonds were issued last week, data compiled by Bloomberg show. The tally was the most in a week since the start of the year, according to analysts at Toronto-based Royal Bank of Canada.
The euro-area economy contracted in the first three months of 2013, extending the region’s recession to a record sixth quarter. Italy’s gross domestic product shrank 0.5 percent in the three months through March, compared with the 0.4 percent drop forecast by economists. Prime Minister Enrico Letta’s cabinet agreed May 17 to suspend the payment of a residential property tax due in June and to review it by the end of August. It also approved extra funding for jobless benefits worth 1 billion euros.
Spanish Prime Minister Mariano Rajoy has European Commission approval for more time to tackle his nation’s budget deficit which, at 10.6 percent of GDP, is the largest in the European Union. The unemployment rate, which reached 27.2 percent in the first quarter, will peak this year as economic output contracts 1.5 percent, according to estimates from the International Monetary Fund.
“Peripheral countries are still in recession and it is true that they are facing a challenge to bring down their deficits,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “On the other hand, the longer- dated peripheral bond market is still relatively cheap, which is why you still see that investors are attracted to it. What is important is the perception that they are committed to reducing their deficits.”
For Newport Beach, California-based Pimco, which manages the world’s biggest bond fund, a clouded growth outlook outweighs the prospect for returns.
“We would steer clear of the long end of European curves,” Andrew Balls, Pimco’s head of European portfolio management in London, said in a May 15 interview on Bloomberg Television with Francine Lacqua. “If you have great insight, a good crystal ball on how Europe is going to develop over the next few years then you may want to take the longer-term exposure. From our point of view, we don’t have that crystal ball and what you see is very little growth.”
GDP in the 17-nation euro zone contracted 0.2 percent in the first quarter after a 0.6 percent decline in the previous three months, the European Union’s statistics office in Luxembourg said last week. The median of 39 estimates in a Bloomberg News survey was for a 0.1 percent contraction.
Pimco prefers short-maturity European sovereign debt because of the “greater visibility,” Balls said.
The ECB cut its benchmark interest rate to a record low of 0.5 percent this month and President Mario Draghi said he’s ready to act again if needed.
Greek government bonds maturing in more than 10 years were up 34 percent this quarter through May 16, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies. Irish bonds of similar-maturity rose 6.9 percent, Portugal’s 9.6 percent, Spain’s 9 percent and Italy’s 7.2 percent.
“So far there has been a lot of demand even though the issuance has been pretty high,” said Anders Moeller Lumholtz, a senior analyst at Danske Bank A/S in Copenhagen. “Of course the increased issuance can damp this for some time, but the high amount of liquidity coming from global central banks and the increased purchases by the Bank of Japan will continue to support peripheral bonds.”
[Bloomberg]
