(Bloomberg) -- The tide may have turned for Italian bonds.
Amundi SA, JPMorgan Asset Management and Fidelity International are bullish on the country's debt in a week that saw the securities wipe out this year's decline and outperform other euro-area bonds on Wednesday. That came as Italy won an upgrade from S&P Global Ratings, passed an electoral reform bill that will damp the chances of a populist party gaining power, and will see continued bond buying next year from the European Central Bank.
“This is a very good point for Italy,” said Isabelle Vic-Philippe, a money manager at Amundi, which oversees 1.4 trillion euros ($1.6 trillion). “If you want to grab some premium, you have to be invested in Italy and be overweight.”
The country's debt has endured a turbulent year as political risk surged in France and the Netherlands ahead of Italy's own elections early next year, with the anti-establishment Five Star Movement threatening to overhaul the established political order. The bonds have also been weighed down by fears that the ECB would withdraw its stimulus program, given that the central bank has been consistently overbuying from Italy to make up for a shortfall in other markets.
Those worries abated over the last week. The S&P rating upgrade came after the ECB announced on Oct. 26 that it would still pump 30 billion euros per month -- plus reinvestments -- into the euro-area economy for at least nine months of 2018. Those purchases are likely to be weighted in favor of Italy, which, alongside France, has the largest amount of outstanding debt on the continent. The same day, the Italian senate passed a law that favors coalitions, making it harder for Five Star to enter government as it has ruled out teaming up with another party.
The elections are now seen as less of an issue or a potential source of uncertainty than they were before, said Andrea Iannelli, a fixed-income investment director at Fidelity, which overseas $313.5 billion. Italian bonds offer “good yield pick-up” at a time of depressed volatility in the market.
Italian 10-year bond yields fell two basis points to 1.81 percent on Wednesday, after touching 1.79 percent, the lowest since Jan. 3. Other European bond yields climbed. In October, the securities enjoyed their best month since July 2015, with yields sliding 28 basis points, while the spread over their German counterparts tightened 18 basis points.
Not all money managers have turned positive. James Athey, a money manager at Aberdeen Standard Investments, who oversees about $5 billion, is maintaining his short position in Italian bonds versus their German counterparts despite recent events.
“I'm happy to be positioned that way now, looking for the market to start worrying about the election toward the end of next year and beginning of next,” he said, looking for yields to climb to around 2.2 percent. “It still doesn't occur to me that you can end up with politics that achieve anything. What Italy really needs is to make some serious structural reform and I don't see a likely political outcome where that's possible.”
For JPMorgan Asset Management, it is the economy that is shaping their long position, expecting the spread over Germany to contract even further to 125 basis points by the end of the year, from 143 basis points now. It could narrow to potentially 100 basis points beyond that, for the first time since early 2016, according to Nick Gartside, its chief investment officer for fixed income.
“Take a look at the fundamentals -- that's a very good illustration of how Europe's recovered in an economic perspective,” Gartside said. “Investors are quite desensitized” to Italian political events.
To contact the reporters on this story: John Ainger in London at jainger@bloomberg.net, Anooja Debnath in London at adebnath@bloomberg.net.
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, Keith Jenkins
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