Mediterranean Bonds Renew Risky Status on Virus-Driven Slump
Mediterranean Bonds Renew Risky Status on Virus-Driven Sell-Off
(Bloomberg) -- Italian and Greek bonds are sliding as the coronavirus spreads in Europe, bucking a global debt rally to show the securities have returned to being considered risky.
Both nations’ bonds posted the biggest weekly rise in yields this year as Italy struggled to contain the spread of the virus in its northern economic heartland. That is a turnaround from their strong showing in January, when they shrugged off virus fears to be the region’s top performers.
“Non-core sovereigns were behaving as ‘safe’ assets in the face of the risk-off move associated with the COVID-19 outbreak,” Chris Attfield, a fixed-income strategist at HSBC Holdings Plc, said in a note. “However, the news that Italy had the largest number of cases outside Asia provoked a phase change: spread widening made BTPs behave like a risky asset, not a safe haven.”
Italy’s 10-year yields rose as much as seven basis points to 1.05% on Wednesday, while the equivalent Greek yields jumped 12 basis points to 1.19%. The latter broke to a record low below 1% just two weeks ago, leading analysts to call the turnaround from a debt crisis a decade ago as “amazing.”
Greek bonds are now being outperformed this year by Germany and France, as investors pile into havens. While they still offer the region’s highest yields, credit risks are diminishing that appeal.
Positioning in futures contracts showed the largest single-day jump in Italian bonds on Monday since Sept. 2, while in bunds they increased by the most in almost three months. Given the market’s direction, that implies new short positions in Italy and long bets in Germany, pointing to a further blowout in Italy’s yield premium.
Investors are now looking ahead to Italy’s sale of up to 6.5 billion euros ($7.1 billion) of five- and 10-year bonds on Thursday to gauge demand for debt that offers some of the euro area’s highest yields.
HSBC is maintaining a call to buy seven-year debt from Spain, as the country is so far proving more resilient. Spanish and Portuguese 10-year yields still rose three basis points, while German bund yields were little changed.
--With assistance from Cecile Gutscher.
To contact the reporters on this story: James Hirai in London at jhirai3@bloomberg.net;John Ainger in London at jainger@bloomberg.net
To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Neil Chatterjee, Anil Varma
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