Italy Bonds Find Love Again as ‘Perfect Recipe’ Wins Nordea AM

(Bloomberg) --

It wasn’t long ago that political risks were warding investors off Italian bonds but now they just can’t seem to get enough.

Nordea Asset Management is buying benchmark notes from the euro area’s third-largest economy after the new government toned down a previously combative approach to the European Union. While the region faces an aging population and tepid inflation, a significant portion of Italy’s savings should get invested in bonds, helping boost the market, according to the fund.

We “love Italy,” wrote Sebastien Galy, Nordea AM’s senior macro strategist, in a note to clients. “Italians save a lot, as can be seen by their 2.6% current account to GDP ratio, and so does the euro zone as a whole. A significant part of this will go into fixed income wherever yield and safety can be found.”

Bond investors were swift to take advantage of the improving political climate in Italy after the euroskeptic leader of the right-wing League Party, Matteo Salvini, was excluded from government. Yields on 10-year debt hit record lows in the aftermath, narrowing the spread over German equivalents, a key gauge of risk in the nation, to levels before the 2018 budget dispute with the EU. The country’s bonds have already returned 14% this year.

The new coalition formed by the Five Star Movement and the Democratic Party, while fragile, is expected to be less confrontational toward the EU. The government expects a deficit of around 2% to 2.1% of output next year, according to a senior official, below the trade bloc’s 3% limit.

Despite the rally, Italian bonds still remain attractive, offering some of the highest premiums in a region where large amounts of debt now yield less than zero. The euro area has been besieged by accusations of “Japanification” given its anemic growth and inflation -- a sign that the ECB may never be able to unwind its unprecedented package of monetary stimulus.

ECB President Mario Draghi announced a fresh set of measures earlier this month, including a rate cut and another batch of quantitative easing. Italy is seen as being one of the main beneficiaries, given its large stock of outstanding debt.

It’s “a perfect recipe for fixed income solutions,” wrote Galy. “The European periphery, such as Italy and Greece, are obvious choices in the fixed income space.”

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, William Shaw, Anil Varma

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