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Bond titans led by Pimco double down on their big bet on Europe


NOT even the calamity of disease, debt and Italy's fiscal woes are enough to stop the world's biggest money managers from a trade that's at the heart of Europe.

Investors at Pacific Investment Management Co (Pimco), Axa Investment Managers and AllianceBernstein Holding are counting on bond prices climbing in Europe's weakest countries, even with yields already hovering near all-time lows. In Italy, Europe's first epicentre of the crisis, bonds have rallied to pre-lockdown levels and the 10-year rate is now a paltry one per cent.

But that may be enough. For investors who are having to scrape the barrel for returns, there are good reasons to buy European assets. Political leaders have backed an enormous amount of stimulus for the region and against a landscape of about US$16 trillion of bonds with negative yields, some interest is better than none at all.

"You have the confidence of a monetary anchor that shields sovereign balance sheets," said Nicola Mai, who leads Pimco's sovereign credit research in Europe. The asset manager, which oversees US$1.8 trillion, has a "modest" overweight position in Italian and Spanish debt.

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"The belly of the curve is the part where we see some value," he added, referring to bonds that typically have a maturity between five and 10 years.

Buying debt from Europe's periphery comes with risk. The anti-establishment Five Star Movement is the biggest partner in Prime Minister Giuseppe Conte's coalition and it's possible that a populist party with extreme views could eventually gain more power, said Mr Mai.

There's precedent for that too. In 2018, a tie-up between Five Star and Matteo Salvini's League party caused spreads to balloon and the 10-year yield reached as high as 3.6 per cent

The other issue is Italy's extreme debt burden. The nation's debt-to-gross domestic product was already expected to exceed 150 per cent when the government approved another round of spending worth 25 billion euros (S$40.47 billion).

"What separates Italy from its neighbours is the country's weak long-term outlook - economic fragility can be especially disastrous for a deeply indebted nation," Bloomberg Intelligence economist David Powell wrote in a recent report.

Supporting the bull case is a 750 billion euro economic rescue package, which investors have interpreted as a guarantee by Europe's strongest countries to use their full arsenal to save the bloc's weakest nations. The spread between Italian and German yields, a measure of risk in Europe, has plummeted more than 150 basis points since a recent peak in March.

"Investors are hopeful that in 'x' number of years, the EU will be looking like a true fiscal, monetary and political union," said Alessandro Tentori, chief investment officer at Axa Investment Managers. "That is very positive for risky assets." Axa boosted exposure to Italian debt in June, and estimates the 10-year yield could fall to 0.75 per cent.

The fact that Italy and Spain are still offering any positive yield may be enough to keep drawing investors in a world in which a quarter of all investment-grade debt has rates below zero per cent. BLOOMBERG

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