Tough Sell for BlackRock, Aviva to Join Italian Bond Comeback

(Bloomberg) -- Italy’s bonds are on a roll but it’s not enough to bring some of the world’s biggest money managers on side.

BlackRock Inc., the world’s largest asset manager, is maintaining an underweight position in Italian government debt. Aviva Investors, which oversees $477 billion, prefers to profit from the comparable returns offered by holding European banking debt.

Italian bonds have continued to rally since the country’s March 4 election despite no clear winner emerging, with the spread over benchmark German bunds falling to the lowest level since 2016. President Sergio Mattarella has instructed Senate Speaker Elisabetta Casellati to see if the euroskeptic Five Star Movement, the party that won the most votes, and a center-right bloc can form a government, in the latest effort to break the impasse.

“The political situation is still very unresolved and that still hasn’t changed,” said Scott Thiel, BlackRock’s deputy chief investment officer for fundamental fixed income. “The risk-premium in Italy is too low to what it should be.”

While Italian bonds are an attractive buy for foreign investors on a currency-hedged basis, Aviva money manager James McAlevey prefers owning European bank debt, which have similar yields but are less exposed to a slowdown in European Central Bank buying. He has a neutral position on Italy’s government notes, wary that political tension could flare up.

Tempered Rhetoric

Still, there are signs that Five Star have tempered some of their more hardline positions against the European Union and the common currency. That has assuaged JPMorgan Chase & Co., which recommends an overweight position in peripheral European bonds, including Italy, albeit with hedges such as holding low-coupon Italian bonds versus high-coupon ones.

“Markets will likely be supportive of Casellati’s mandate, given that she would work toward maintaining economic policy stability and fiscal discipline, while making some concessions to Five Star Movement,” said Matteo Ramenghi, chief investment officer for Italy at UBS Global Wealth Management.

There are also echoes of the gains seen by Spanish bonds in the wake of Catalonia’s independence push, highlighting that many investors are keen to overlook political turbulence in order to snap up higher-yielding debt. Fast-money accounts have been building up a long position in Italian bonds, but that could leave them exposed to headwinds, according to Credit Agricole SA.

Italian 10-year bond yields climbed three basis points to 1.75 percent as of 10:45 a.m. in London, having touched a four-month low of 1.71 percent Wednesday. The yield spread over similar German bonds was at 1.19 percent, the lowest since September 2016.

Even if the political parties find a compromise, it would still not be a market-friendly outcome for a country grappling with debt at 130 percent of gross domestic product, according to Nomura International Plc. The bank recommends investors position for the Italy-Germany 10-year yield spread to widen to 160 basis points.

“The Italian political backdrop may turn out to be yet another unstable outcome,” said Aviva’s McAlevey. “We are cautious that this is a lasting equilibrium.”

©2018 Bloomberg L.P.

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