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Italian Bond Crisis Provides Opportunities In Spanish And Portuguese Bonds

Following concerns around the impact of the political situation in Italy on markets, Fabrizio Quirighetti, CIO and Co-Head of Multi-Asset at SYZ Asset Management, commented:

“The recent change in attitude of the Italian populist-extremist coalition towards the euro has triggered the current crisis. Until mid-March, the campaigns and narratives of the Five Star and Lega parties were primarily focused on immigration, and thus had almost no impact on markets.

“Given the magnitude of the jump in Italian government bond yields over the last few days, we can really speak about a crisis. The markets are reacting normally for a crisis, with safe-havens including German bunds, US treasuries, USD, CHF and JPY flying higher, while equities and credit are under pressure, especially if related more or less directly to Italy and Europe.

Italy vulnerable to anti-EU rhetoric

“As in the situation with Greece a few years ago, it is key for markets and the future Italian government to know if a sufficiently large majority really wants to exit the euro. If not, the anti-EU rhetoric should be more muted and not have such a large impact on markets. If so, it would be fair to expect more trouble for Italian assets.

“In any case, we believe the surge in other peripheral yields such as Spain or Portugal is to some extent overdone. European institutions now have tools such as the European Stability Mechanism and the ECB’s Outright Monetary Transactions to contain the contagion risks from Italy to other countries, as long as these countries “respect and comply” with the euro rules. The political commitment of these countries to the euro and European Union institutions remains strong. 

“As far as Spain is concerned, we think the current political uncertainties, not at all related to any anti-euro sentiment, just arrived at a bad time. Yesterday morning, we added marginally to Spain five-year government bonds and Portugal 15-year government bonds in our EUR fixed income funds, where we have very low or little exposure to Italian government bonds, are neutral on Spain and overweight in Portugal.”