Buying Opportunity for Italian Bond Investors

Italy’s gamble on passing a constitutional referendum is turning into a buying opportunity for some bond investors.

The country’s sovereign debt has become cheaper relative to its peers’ in the run-up to the Dec. 4 vote which, if rejected, threatens to destabilize the government. The yield premium investors demand to hold 10-year securities versus similar Spanish debt soared to its highest closing level in almost two years this month, Bloomberg reported.

Yet for Pioneer Investments, that underperformance makes Italy attractive, particularly with its risk limited by the European Central Bank’s stimulus plan. That provides a “safety net” for Cosimo Marasciulo, Pioneer’s head of government bonds, who helps manage €220 billion ($240 billion) from Dublin. He bought some of Italy’s first-ever 50-year bonds sold earlier this month.

“On Italy, you need to separate the fundamental story from the market reaction,” said Marasciulo, who co-manages the Euro Curve 10+Year fund that returned 11% this year, beating 94% of its peers. “If a ‘No’ wins, the ECB is there and is ready.”

 The QE Program

That’s become a familiar refrain in bond markets. The ECB’s €1.7 trillion ($1.9 trillion) quantitative-easing program has shielded eurozone debt from political turmoil in Spain, Portugal and Greece since its launch in 2015. Even so, the recent upsurge in Italian yields may underscore a shift that has some investors heeding Europe’s divergent political risks, especially since speculation erupted this month over when the central bank may begin tapering its stimulus.

The extra yield investors demand to hold Italian 10-year securities over similar-maturity Spanish bonds was at 0.25 percentage point on Friday, down from 0.37 percentage at the Oct. 10 close, its highest since October 2014. That’s still an appealing Italian yield for investors who figure the stress around the referendum had reached its limits, and that the yield will move towards where it’s been for most of the last five years—below Spain’s.

The ECB’s backstop, together with the Italian government’s progress it curbing budget deficits, make JPMorgan Chase & Co.’s asset-management arm upbeat on the nation’s debt securities.

“Political risks will come and go, but ultimately when you look at the fundamentals there, Italy looks good,” said Nick Gartside, the London-based chief investment officer of fixed-income at the JPMorgan unit, which manages $1.7 trillion in assets globally. “Even if growth is a bit slow, the budget deficit is quite low in a European context.”

JPM’s Gartside likes both Italian and Spanish sovereign debt, “particularly longer-dated bonds.”