Italy `Unfairly Punished' as EU Debt Crisis Proxy
By Anchalee Worrachate - Jan 10, 2011 1:01 AM GMT+0100 Mon Jan 10 00:01:00 GMT 2011
Italy, whose 10-year bond yields are near their highest in two years, may be a safer investment than its peers as the nation’s banks dodge the woes plaguing lenders in the euro region’s most indebted nations.
“Italian bonds are unfairly punished,” said Frances Hudson, who helps oversee about $220 billion as head of global thematic strategy at Standard Life Investments in Edinburgh. “It doesn’t have the same structural problems that other peripheral countries have, and yet they are sold off because they are seen as a proxy to those bonds. From that perspective, their yields are attractive.”
Italy, which has the euro region’s second-largest debt burden, has fared better than its neighbors since
Greece’s near- default last year drove up borrowing costs. Unlike
Spain and Ireland, Italy’s economic growth wasn’t fueled by a housing and borrowing boom, and its banks haven’t had government bailouts.
The country’s 10-year bonds yield 4.8 percent, after jumping by a percentage point in the past three months. Investors lost 0.7 percent, including reinvested interest, on Italian debt last year. That beat Greek securities, which lost 20 percent, as well as the bonds of
Portugal, Ireland and Spain.
“
Italy has a relatively high savings rate and domestic investors reinvest those savings into Italian bonds,” said Stuart Thomson, who helps manage $110 billion at Ignis Investment Management in Glasgow. “We are very cautious still about peripheral bonds, but we are willing to take risk through an exposure to Italian securities.”
Matching Benchmark
Italian
household debt was the equivalent of 44 percent of gross domestic product in 2009, less than half the level of Spain and Portugal, according to Bloomberg calculation based on
Bank of Italy and Istat data.
Thomson said he’s been getting rid of Belgian bonds and Portuguese securities, while maintaining Ignis’s Italian holdings at a level that matches the index it uses to measure performance. The fund has a so-called underweight position in Spanish bonds, he said.
Investors pay less in the credit-default swap market to insure A+ rated Italian debt against default than they do to protect Spanish securities, which are rated two levels higher at AA by Standard & Poor’s Corp.
About 46 percent of Italy’s debt is in the hands of foreign investors, according to UniCredit SpA, compared with as much as 80 percent of Portugal’s borrowing. Ireland relies on non- domestic buyers to buy as much as 85 percent of its bonds, according to NCB Stockbrokers in Dublin.
‘Constructive on Italy’
“
We are constructive on Italy and see value in Italian government bonds,” said Oliver Eichmann, a portfolio manager at DWS Investment GmbH in Frankfurt, Germany’s biggest mutual fund manager. “The economic situation in Italy is OK, and we find its short-dated bonds attractive given yields are high and the country is unlikely to need help.”
Italian two-year yields of 2.7 percent are 183 basis points higher than their German counterparts, up from less than 80 in October and compared with an average of just 36 in 2009.
Italian business confidence rose for a third month in December to the highest in almost three years as executives shared consumers’ optimism about the economic recovery, according to an ISAE report on Dec. 30. Italy is the only high- deficit country in the euro region to avoid a credit rating downgrade since the sovereign crisis erupted at the end of 2009.
Italy’s primary budget deficit, or the budget balance less interest payments, will turn into a surplus equivalent to 0.5 percent of GDP this year, compared with a shortfall of 0.5 percent in 2010, according to forecasts released by the employer association Confindustria on Dec. 16.
(Bloomberg)
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