BlackRock Shuns Italian Bonds as Political Turmoil Adds to Gloom

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(Bloomberg) -- Italy’s inconclusive election has darkened what was an already unfavorable backdrop for the nation’s bonds, according to BlackRock Inc.

Scott Thiel, deputy chief investment officer at BlackRock, dubbed the outcome of the March 4 vote as the worst possible. With anti-establishment parties vying to form a government following the election, which yielded a hung parliament, the world’s biggest asset manager says it is underweight Italian securities.

The political impasse further taints the allure of Italian debt at a time when the European Central Bank is looking to end its asset-purchase program this year. Italy has been among the biggest beneficiaries of quantitative easing, based on the capital key measure, a GDP-based benchmark of how much of a country’s debt the ECB can hold.

While Italy’s bonds have underperformed German bunds since the vote, as well as those of their peripheral peers in Spain and Portugal, yields on benchmark Italian 10-year debt have hovered around 2 percent. That hints that there may be some complacency among investors, according to BlackRock’s Thiel.

The election resulted in the “worst outcome possible and yet the market didn’t react at all,” he told reporters in London last week. “If the idiosyncratic issues won’t impact Italian bonds, what will? And I think what will, will be this broader withdrawal combination across the euro area,” referring to the end of the ECB’s bond-buying program.

Italy’s 10-year yield fell three basis points to 1.93 percent as of 1:20 p.m. in London, having traded between 1.9 percent and 2.1 percent for most of the year. The yield spread against German counterparts was 134 basis points, up three basis points since before the vote.

©2018 Bloomberg L.P.

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