BlackRock Buys Spanish Bonds on ‘Ridiculous’ Spreads
By Bo Nielsen
Jan. 26 (Bloomberg) -- BlackRock Inc., the biggest money manager traded in the U.S., said it started buying Greek, Spanish and Italian government bonds after yield spreads widened to the most in a decade.
Prices now reflect odds of between 10 percent and 20 percent that the euro-region will disintegrate following a series of credit downgrades from Standard & Poor’s this month, according to BlackRock. The difference in yields, or spreads, between the three nation’s 10-year bonds and those of benchmark German securities was close to the widest today since the euro’s debut in 1999.
“You have got to ask yourself at what point this becomes ridiculous,” Scott Thiel, head of European fixed income in London at BlackRock, which manages $1.3 trillion, said in an interview Jan. 23. “That’s too high if you step back and take a deep breath. We’ve begun to add back exposure” of these bonds.
The spread between German 10-year bunds and comparable Greek bonds ballooned to 297 points last week, before narrowing to 280 basis points today. The equivalent on Spanish securities widened to 123 points on Jan. 21, two days after the nation lost its AAA rating at S&P. The rating company also lowered Portugal’s and Greece’s classifications one step.
The yield on Greek 10-year government bonds averaged 48 basis points more than the German bund since the euro’s debut. The spread to Spanish bonds averaged 15 basis points. For Italy, the average difference was 30 basis points, compared with 152 basis points today.
Investor Opportunities
The downgrades created opportunities for investors, said Thiel. While spreads may widen further before they narrow, markets have exaggerated the likelihood that the cost of bank bailouts and economic stimulus packages will force some countries to abandon the euro, he said.
“It’s very unlikely this will happen,” Thiel said.
The bond yields of some European nations surged as governments planned to sell record amounts of debt in 2009 to revive economies battered by the global recession.
The 11 biggest economies in the euro region will increase government debt issuance this year by about 26 percent to 1.05 trillion euros ($1.38 trillion) from 830 billion euros in 2008, London-based Riccardo Barbieri-Hermitte, head of European rates strategy at Bank of America Corp., wrote in a report last month.
‘Tremendous Value’
“People are piling into this trade,” said Niels From, chief analyst in Copenhagen at Nordea Bank AB, the biggest Nordic bank by market value. “It’s a highway you don’t want to step onto or you’ll get run over. The spreads look excessive from a fundamental perspective but they’ll likely widen from here before they narrow again.”
BlackRock is among a group of investors including ING Groep NV and Goldman Sachs Group Inc. that are betting the market is exaggerating the odds of a euro-region breakup.
ING, the biggest Dutch financial-services company, said on Jan. 22 that Spanish, Irish and Greek bonds were “outright cheap.” Goldman Sachs, based in New York, advised clients on Jan. 15 to buy Italian 10-year bonds, targeting the spread to the bund of 100 basis points from the current 152 basis points.
Investors are betting the euro region will struggle to contain budget deficits that exceed the 3 percent limit outlined in the Stability and Growth Pact. Fiscal deficits will reach 11 percent in Ireland, 6.2 percent in Spain and 3.8 percent in Greece this year, according to ING.
Some euro-region members now pay more to borrow than emerging markets such as Poland and the Czech Republic. The spread between a Czech 10-year sovereign note and the German bund was 78 basis points, less than Italy, Spain, Greece, Portugal, Belgium and Ireland. The Czech Republic is rated A at S&P, and Poland A-.
“In hindsight these spreads will hold tremendous value,” said Amsterdam-based Padhraic Garvey, head of investment-grade debt strategy at ING. “The market seems keen to price in the worst-case scenario.”
To contact the reporters on this story: Bo Nielsen in Copenhagen at
[email protected] 