LIVE MARKETS-BlueBay adds French, Italian debt exposure

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BLUEBAY ADDS FRENCH, ITALIAN DEBT EXPOSURE

High debt levels and fiscal worries saw French and Italian government debt fall out of favour recently, with political uncertainty also in the mix.

But BlueBay have added to exposure in Italy and France recently, fixed income CIO Mark Dowding said, arguing the economic outlook has left BlueBay relatively constructive on European yields.

Inflation might be back below the European Central Bank’s 2% target in a year’s time as base effects that have been pushing inflation higher reverse, he said, and markets seems to be underestimating the chance of just one more ECB hike in December followed by easing eventually next year.

“We would also note that in a world where energy prices have marched relentlessly higher, so this has created upward pressure on euro sovereign bond spreads. Therefore, should this reverse, then those countries such as France and Italy, which carry the highest debt burdens, can be the largest beneficiaries,” he said.

BlueBay is still structurally more bearish on France, Dowding said, but “it is clear that investors are broadly short OAT exposure at this time and so the pain trade may be for spreads to narrow over the next couple of months , and this represents a tactical opportunity on the long side.”

He adds the belief that the Eurozone is unlikely to break up any time soon, means sovereign credit spreads are wider than is justified by an analysis of likely default rates over the coming investible time horizon.

(Sophie Kiderlin)

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