LONDON Jan 14 The surge in peripheral euro zone
government bonds is a global phenomenon, driven by investors
around the world lured by relatively high yields in a world of
low, often sub-inflation returns.
This is significant because it eases fears that the euro
crisis had seen a "balkanisation" of euro bond markets, where
the only real demand in some countries was from domestic banks
and local investors as cross-border investment dried up.
Domestic banks are still large holders of their national
sovereign bonds - a record share in the case of Portuguese banks
and near record share in Italy - but are now far from alone as
the region's financial system slowly heals.
Pacific Investment Management Company, LLC, or PIMCO, the
world's biggest bond fund, holds its largest ever position in
the euro zone periphery, and Japanese investors are buying
Spanish and Italian bonds at a pace not seen for five years.
A stabilising euro zone economy and banking system saw U.S.
money market funds increase their funding of European financial
institutions by 11 percent in the fourth quarter of last year,
according to Moody's.
Add the diminishing risk of euro zone break-up and the
prospect of further action from the European Central Bank to
counter extremely low inflation, and the overseas money has
"We're overweight Italy and Spain, the most liquid markets,"
said Andrew Balls, head of European portfolio management at
PIMCO who oversees a team which manages $400 billion.
Balls said PIMCO's position in these bonds isn't "maximum"
overweight due to valuation and concerns over how these
countries will reduce their debt in the coming years when
economic growth is low and unlikely to accelerate meaningfully.
In the years preceding the euro zone crisis PIMCO was
heavily underweight peripheral bonds.
"We own more now than we did back then," said Balls.
Balls prefers Spain and Italy over Portugal and Ireland, two
of the bloc's smaller but most indebted countries who last week
sold debt in hugely oversubscribed placements, with investors
bidding for more than three times the amount offered.
Portugal's 3.25 billion euros sale attracted bids of more
than 11 billion from 280 accounts worldwide. Of the amount sold,
88 percent went to non-Portuguese investors. But notably, they
included only other Europeans, not U.S. or Asian investors.
Ireland's return to the international bond market drew huge
demand for its first post-bailout debt sale, with investors
bidding more than 14 billion euros for the 3.75 billion sold.
North American investors accounted for 14 percent of buyers.
The largest overseas private sector holder of Irish debt is
U.S. fund Franklin Templeton, which built up its stake over the
course of 2012 to as much as 10 percent of all outstanding Irish
Other investors are now following that lead, seeing the
bonds as less likely than before to swing widely in price.
"As the tail risk has reduced, cross border flows have
re-emerged," said Alan Wilde, currency and bond portfolio
manager at UK-based Barings Asset Management, which has $58
billion of assets under management.
"We have not participated in auctions but have added
modestly to exposures in Ireland, Italy and Spain over the last
few months," he said.
JAPAN DIPS TOES BACK IN
Data from Japan's Ministry of Finance show Japanese
investors' net buying of Spanish bonds in November was $1.5
billion, the biggest monthly amount since 2006. The net purchase
of Italian bonds that month was $709 million, the most since
The three-month average of Japanese investment in combined
Spanish and Italian debt was a more modest $1.5 billion. But
that shows a marked turnaround from the trend in place since
early 2011, and is the biggest flow into these bonds since 2009.
Still, Asian investors have been more reluctant than others
to buy debt in the European periphery. Only 4 percent of
Ireland's bond sale earlier this month was allocated to "other"
geographical regions outside Europe and North America.
Kokusai Asset Management, whose Global Sovereign Open fund
is the largest mutual fund in Asia, with $127.88 billion of
assets under management, is increasing exposure to euro zone
bonds but still steering clear of the periphery because of a
policy of investing only in debt rated A or higher.
"Whether we'll consider restarting investments in such
countries like Spain and others totally depend on whether their
ratings climb above the A category," said Masataka Horii, chief
fund manager of the fund.
Spain is rated BBB- and Baa3 by S&P and Moody's,
respectively, the lowest possible investment grade ratings and
three notches from single-A. Portugal is non-investment grade or
junk-rated by the main ratings agencies, while Ireland is only
one notch below A rating according to Standard & Poor's and
Fitch, but still rated junk by Moody's.
U.S. asset manager BlackRock Inc., the largest in
the world with over $4 trillion of assets under management,
prefers Portuguese bonds over Spanish and Italian because there
is more room for yields to converge with benchmark Germany.
"We are invested in both Italy and Spain," said Scott Thiel,
deputy chief investment officer and head of global bonds at
BlackRock who manages around $100 billion of assets. "But we've
trimmed our positions over the last couple of months, it's fair
His portfolio is roughly split evenly between UK, euro zone
and global bonds. But the good run euro zone bonds have had of
late makes him cautious.
Thiel says Spain is now close to what he and other investors
deem "fair value" against the benchmark Germany, a yield
differential of 150-200 basis points. The spread narrowed to 180
basis points earlier this month, and is now around 200.