Investors Drop Italian Bonds, Seeking Safety in German and French Debt
27 February 2020 - 6:19PM
Dow Jones News
By Avantika Chilkoti and Paul J. Davies
Investors are shunning Italian government bonds after the
country became Europe's epicenter for the coronavirus outbreak this
week, leading to renewed worries about one of the region's most
indebted economies.
Yields on the country's 10-year bonds rose, while those on
German and French debt slid, signaling that fixed-income investors
in Europe are pulling out of Italian sovereign debt and heading
instead for the safety offered by less indebted economies. The week
has also seen a sharp selloff in equities and other risky assets
globally because of fears about how growth might suffer during a
prolonged outbreak.
Investors tend to rush to the safety of government bonds when
the world looks riskier. But in southern European countries such as
Italy, Spain, Greece and Portugal, investor skittishness has tended
to infect sovereign-debt markets, too, in recent years. Since the
2008 financial crisis and the subsequent eurozone crisis of 2011
and 2012, these countries' high debt levels and worse economic
problems have made them more susceptible to selloffs.
Investors' move from riskier to safer government bonds has
sharply increased the extra yield on Italian debt over German debt.
On Thursday, that extra yield -- or spread -- on Italian 10-year
bonds rose to 1.546 percentage points, which is up from the recent
low of 1.287 percentage points two weeks ago, according to
FactSet.
Part of this is German yields falling as investors rushed for
safety as well as Italian yields rising: German 10-year yields
slipped from minus 0.445% at the end of last week to minus 0.561%
on Thursday. Italian yields jumped from 0.896% to 1.521% in the
same period.
However, that is still far below the spread of more than 3
percentage points reached in late 2018, when Italy's government was
building up to a showdown with the European Union's leadership over
its generous spending and borrowing plans and fears rose that it
could ultimately leave the eurozone.
Since then, the U.S. and European central banks have been forced
back into interest-rate cuts and government-bond buying to support
the economy and relive financial strains.
Some analysts think the selloff in Italian bonds could be a lot
worse. The reason: Italian yields have been contained by investors'
expectations that any serious economic disruption would lead to an
increase in the European Central Bank's bond-buying program, which
was restarted late last year in an effort to boost inflation.
Yields on Spanish and Portuguese bonds have also risen, though much
less than Italy's, while Greek bond yields have jumped the
most.
"If they think if the eurozone is very weak -- and Italy is a
big part of that -- the ECB is going to have to act, and one of the
things they're going to do is buy the bonds," said Tom Kinmonth,
senior fixed-income strategist at ABN Amro Bank NV.
Even though Italian bonds are being sold down, in general the
market is still favoring central-bank assets as the fast-spreading
epidemic leads to anxiety about economic growth, said Alberto
Gallo, head of macro strategies at fund manager Algebris.
"We know that this is going to end up in fiscal and monetary
stimulus, so we are not likely to bet against government debt from
here," Mr. Gallo said.
Italian government debt could be among the biggest beneficiaries
of ECB efforts to support the economy because it owns a smaller
share of the country's bonds than most, which means it has room to
buy more Italian debt before hitting limits.
Investors have grown jittery as the coronavirus outbreak has
spread across Italy. By Thursday, 528 people in the country had
contracted the virus, of whom 14 had died, making Italy the biggest
epicenter outside Asia.
The virus has particularly hit the region of Lombardy, which
generates 22% of Italy's economic output, and Veneto, which
contributes a further 9%, according to estimates from Commerzbank.
Some companies in the affected regions have reported a halving in
production because of canceled orders, analysts at the bank
said.
Equities in Italy have suffered alongside bonds. The benchmark
FTSE MIB index dropped more than 9% over the past week, roughly in
line with the broader European market.
For the bond market, however, the pickup in yields may become
hard to resist for investors starved for income. The rise in yields
is likely to be short-lived, according to Didier Saint Georges,
managing director at Carmignac, a European asset manager.
"There is a scarcity effect," Mr. Saint Georges said. "We don't
have that many [countries] where you can still get positive yields
on short-term maturities in Europe."
Write to Avantika Chilkoti at Avantika.Chilkoti@wsj.com and Paul
J. Davies at paul.davies@wsj.com
(END) Dow Jones Newswires
February 27, 2020 13:04 ET (18:04 GMT)
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