Italian, Greek Bonds Rally as Hunt for Yield Expands
July 17 2019 - 11:55AM
Dow Jones News
By Daniel Kruger
Investors are buying bonds from once-avoided European countries,
spurred by expectations that ongoing easy-money policies from
central banks will continue to fuel demand for debt.
The yield on Italy's 10-year government bond, which falls as
bond prices rise, has dropped by more than one percentage point
since the end of May, while the yield on Greek 10-year debt has
fallen almost as fast. The moves have outpaced recent declines in
German and U.S. government bonds, which are perceived as safer.
Investors' hunt for yield has been evident at government debt
auctions. Greece sold EUR2.5 billion of seven-year notes Tuesday,
attracting more than four times that amount in bids from investors.
That compares with an offering in Germany last week, where
investors submitted only slightly more bids than the EUR3.15 of
negative-yielding 10-year debt for sale.
Some investors have bought the securities because they are
unwilling to buy safer bonds at increasingly negative yields, while
others have snapped them up because they are part of a diminishing
supply of bonds from European governments that still pay investors
to hold them. Negative-yielding bonds cost investors more to buy
than the combined total of interest and principal payments they
receive in return. That means investors are effectively paying
borrowers to hold their money.
European Central Bank President Mario Draghi surprised some
investors last month when he signaled that the central bank was
prepared to lower interest rates further from their current level
of negative 0.4% and resume purchasing bonds after halting that
policy at the end of last year. Fed Chairman Jerome Powell signaled
the Fed will lower rates at its meeting later this month.
"The European situation tends to go in long cycles," said Robert
Tipp, chief strategist at PGIM Fixed Income, which owns more
Italian and Greek debt than its benchmarks. "Markets have been very
enthused" by Mr. Draghi's signals of further support, Mr. Tipp
said.
Investors have shifted into the riskier bonds at a time when
expectations for interest-rate cuts by the ECB and the Federal
Reserve have pushed the yield on German 10-year debt to record lows
and the 10-year Treasury yield to multiyear lows.
The yield on the benchmark 10-year Treasury note traded
Wednesday at 2.076%, according to Tradeweb, down from 2.124%
Tuesday. The yield on 10-year Greek debt was recently 2.072%, and
the yield on 10-year Italian debt was 1.599%.
Yields on sovereign debt in Germany, France, Holland and several
other countries have fallen to record lows below zero. There are
about $11.4 trillion of bonds with negative yields, which account
for 23% of outstanding debt, according to Bank of America Merrill
Lynch.
That search for yield has led investors from overseas to add to
their Treasury holdings. Foreign investors increased their stakes
in U.S. government debt by 1.6% in May, the most since 2011.
The election of a new government in Greece has supported demand
for its debt, according to investors. Italian yields rose earlier
in the year as some investors became concerned that the
government's plans to run large budget deficits to spur activity in
a slow-growing economy could lead the country to exit from the
European Union. As officials have scaled back their plans, those
worries have largely abated, investors said.
Investors have also bet that International Monetary Fund
President Christine Lagarde, announced as the leading candidate to
succeed Mr. Draghi when his term ends in October, is likely to
maintain policies that support markets. The ECB first set its
deposit rate below zero in 2014.
Concerns remain about the Italian and Greek economies, however,
leading some investors to stay on the sidelines.
"We missed it" with Italy, said Edward Al-Hussainy, a government
debt strategist at Columbia Threadneedle Investments. "We were too
cautious on the fundamentals."
While Mr. Al-Hussainy said he expects yields for Italian bonds
to continue to fall, the firm doesn't intend to chase potential
gains. One reason is that much of the rally has been driven by
other investors chasing gains, further fueling the decline in
yields.
"The momentum factor is huge," he said.
Write to Daniel Kruger at Daniel.Kruger@wsj.com
(END) Dow Jones Newswires
July 17, 2019 12:40 ET (16:40 GMT)
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