Some bond managers are making hay on the recent turnaround of sovereign debt issued by peripheral eurozone countries as European leaders have made sweeping commitments to solve a debt crisis now in its third year.
Managers' strategic purchases of these bonds are in stark contrast to earlier in the crisis, when managers would only dip in and out of these struggling countries' debt tactically.
BlueBay Asset Management LLP, Franklin Templeton Investments, J.P. Morgan Asset Management, Loomis Sayles & Co. LP, Pacific Investment Management Co. LLC and Prudential Fixed Income all have been buying one or more of the eurozone peripheral countries of Ireland, Italy, Portugal and Spain. Most managers are still avoiding Greek bonds because of default risk or being too lowly rated for inclusion in their strategies.
The buying gathered momentum ahead of the Sept. 6 speech by European Central Bank President Mario Draghi, in which he committed to buying short-term debt of European countries to suppress yields.
“The ECB delivered everything the market was expecting, and the details were significant,” especially that buying was effectively unlimited and that the bank would take an equal legal position to other creditors, said Nick Gartside, international chief investment officer for fixed income at J.P. Morgan Asset Management in London. “It's not without implementation risk, but at least now we know the rules. That's a very big difference from even just a few weeks ago.”
Mr. Gartside had moved to neutral from an underweight position earlier in the year, and near the time of Mr. Draghi's speech he moved to overweight Spain and Italy. He also increased positions in Irish debt about a month ago. “We felt there's a risk that Ireland is upgraded (and that) valuations were attractive compared to other eurozone bonds,” he said. His $3 billion strategic bond fund returned 4.9% gross of fees in the eight months through Aug. 31 vs. 0.37% for the London interbank offered rate; the three-year annualized return was 8.05% vs. 0.55% for the benchmark.
“In a world where yields are really low, a lot of those countries represent very attractive opportunities,” said Robert Tipp, managing director and chief investment strategist of Newark N.J.-based Prudential Fixed Income, which runs $348 billion. In the $272 million Prudential Global Total Return Fund, Mr. Tipp has moved to overweight on government bonds from Spain, Portugal, Italy and Ireland. The fund has returned 8.81% so far in 2012 and an annualized 9.63% in the three years to Aug. 31.
More than ever, managers are convinced European policymakers will drive — or will be driven to — tighter fiscal and political integration of the 17-member union. That's giving managers the confidence to venture into these riskier government securities, but they recognize the road to unity will be bumpy and uncertain, so they're staying tactical, too.