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Mediterranean Bonds Cool Off After Summer of Records

John Ainger
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Mediterranean Bonds Cool Off After Summer of Records

(Bloomberg) -- Europe’s Mediterranean bonds are cooling off after a summer of records.

In Italy, benchmark government debt has suffered a fourth straight week of declines, ending a rally that took yields to an all-time low in September. Spanish yields almost turned negative but have since climbed for six weeks -- the longest run in over a year -- and the region’s top-performing Greek bonds just suffered their worst fortnight since 2018.

It’s a sign that investors are growing wary of political risk in the region once again, to the extent that even some of the highest returns offered in the euro area aren’t enough to pull them back in. In particular, Italy’s coalition is looking increasingly shaky, while Spain is lining up its own government pact that threatens to increase debt and may lead to the secessionist movement in Catalonia gaining strength.

On top of that, there are fears that the steady recovery from the euro-area crisis is losing steam in these economies.

“A growth slowdown in the euro area will hit peripherals -- especially Italy -- and then the usual scheme will be in place: rating risk, liquidation risk, political risk, you name it,” said Alessandro Tentori, chief investment officer at Axa Investment Managers. In Italy, “it does not seem to me the government will last for the entire legislature period.”

Italian premier Giuseppe Conte is scrambling for a solution to a crisis over a failed steel plant that has exposed rifts within his coalition and given ammunition to the opposition, led by euroskeptic Matteo Salvini.

At the same time, yields in some other euro nations are creeping back above 0% for the first time in months, meaning the temptation to take on more risk by buying the higher-yielding peripheral bonds is reduced for investors. Those on 10-year French and Belgian bonds climbed above the threshold last week, while 30-year German bonds have yields at around 0.2%.

That has put the brakes on some of the most profitable bond trades. Italy has returned investors 11% this year, while that figure for Spain and Portugal is over 8%, according to Bloomberg Barclays indexes.

For some, the recent sell-off may provide another entry point. Rabobank International and Societe Generale SA are recommending investors use the recent declines to go back into peripheral debt markets before the New Year.

“The recent back up yields will ultimately represent a buying opportunity,” wrote Rabobank strategists led by Richard McGuire.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Neil Chatterjee, Paul Dobson

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