By William de Vries, Head of Core Fixed Income at Kempen Capital Management
Bond investments never are a one way bet, and the price action of the BTP markets in the last two weeks confirms this old market wisdom. Suddenly, the European peripheral bond markets came under pressure without a clear reason. There was nervousness around a tax memo in Greece and, the first quarter European growth numbers did not live up to the elevated expectations, or was it just plain profit taking of those investors who have been buying BTPs since autumn last year? The fact is that all the price gains made in the first week of May were lost, and for the first time this year, investors were forced to rethink their position in Italy this year.
For us, this correction of converging spreads in Europe is a good thing. It clears the market of those short-term investors who just join the bandwagon for the quick win, the so-called weak longs. The investors who remain are those who have a more fundamental view on the developments in Italy and Spain. They see a slow and gradual economic recovery and structural changes in the economy. And those changes are needed, because the positive effects of a weaker Euro are only temporary. On top of that, a depreciating Euro makes investing in Eurozone sovereign bonds unattractive for foreign investors. It has short-term benefits, but the longer-term disadvantages can only be countered by a consistent austerity policy of other Italian governments.
Maybe the election results are good for some tasty headlines and a little political drama, but in our view the impact on the bond markets will be very limited. As we see it, the path towards a strong recovery has clearly been taken.
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