Top Manager’s Bet on Risky Italian Debt Looking Good Already

(Bloomberg) -- Just as everyone was rushing out of Italian debt, Kacper Brzezniak was “sneaking” back in.

The London-based money manager at Allianz Global Investors snapped up Italian bonds across the curve on Monday, in a market that was tail-spinning from crashing oil prices and the spread of the coronavirus.

The trade might have seemed to go against the grain on a day when the securities plummeted more than most peers, driving up benchmark yields by as much as 36 basis points. On Tuesday, however, the debt gained, with the yield retracing some of the previous day’s jump. Brzezniak’s Strategic Bond Fund, which he manages with Mike Riddell, outperformed 98% of its peers in the past month.

“Italy is obviously very affected now but other European countries are catching up, coronavirus-wise,” Brzezniak said on Monday. “Italy seems to be doing the right things. So short-term pain yes, but hopefully long-term gain.”

The London-based money manager notes that Italy sought to contain the pandemic before the rest of Europe, where the situation is deteriorating rapidly. Italy has become the first country to attempt a nationwide lockdown. France meanwhile has banned large gatherings and Spain is looking to shut all universities beginning Wednesday after the number of cases almost doubled overnight.

Brzezniak said he was “just sneaking into some” Italian debt, and was watching the spread between the yield on 10-year Italian bonds versus those on Spanish peers. The gap, which widened to the most since August at about 116 basis points on Monday, could shrink back to 50 basis points, he predicted. The spread was around 101 basis points on Tuesday.

“The spread could go wider first, but it’s not a bad level to start building a position,” he said on Monday, before the spread narrowed the following day.

The arguments against a punt on Italy might seem to be stacking up. It has the worst performing euro-area debt after Greece and Portugal this year, as investors rush for haven assets instead. The spread between Italian and German bonds, the benchmark for European debt and one of the region’s safest securities, on Monday reached the widest since August.

Markets retraced their previous day’s moves with German bonds sliding alongside havens such as U.S. Treasuries and U.K. gilts. While Italian bonds rallied Tuesday, riskier peers from Spain and Portugal continued to fall. The yield on Italy’s 10-year notes slid 12 basis points to 1.30%, its first decline in five days.

Italian sovereigns, which have been a big beneficiary of the European Central Bank’s asset-purchasing program, could get a further boost if policy makers step up stimulus in the face of the pandemic, Brzezniak said.

“The ECB will eventually come back with some more QE, even if ‘temporary’,” he said.

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Anil Varma, William Shaw

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