By Neal
Armstrong and David Goodman - Jan 9, 2014
Europe’s
financial markets are picking up where they left off 2013, extending a rally in
bonds and stocks that’s making the region’s sovereign debt crisis little more
than a fading memory.
Ireland
sold bonds this week, returning to financial markets after completing a
three-year bailout program. Portugal -- another aid recipient -- is holding a
sale today. Banks in Spain and other periphery countries have never been able
to borrow as cheaply as they can now. The Stoxx Europe 600 Index of stocks
closed at its highest level since May 2008 yesterday and the euro is about its
strongest since 2011 against the dollar.
Such is the
confidence in Europe that Greece, which sparked Europe’s sovereign woes in 2009
and required two bailouts, said yesterday it may sell bonds this year. That
would mark a turnaround in the region after nations were shut out of debt
markets, triggering the collapse of governments and causing unemployment to top
12 percent. It took a pledge from European Central Bank President Mario Draghi
in July 2012 to “do whatever it takes” to keep the currency bloc from breaking
apart.
“The market
is feeling very confident,” said Daniel Loughney, a fixed-income money manager
in London at AllianceBernstein Holding LP, which oversees $446 billion. “They
know the ECB will want to support them. It’s in everyone’s interest not to
upset the apple cart.”
BlackRock,
Templeton
Last year’s
rally, led by a 47 percent return in Greek bonds, rewarded investors from
BlackRock Inc. to Franklin Templeton Investors who took a chance on the
region’s financial assets. Sovereign debt yields in the euro area fell to 2.55
percent on average this week, lower even than before the global financial
crisis, Bank of America Merrill Lynch indexes show.
That’s a
reversal from late 2011, when borrowing costs soared to almost 10 percent as
governments sought international bailouts because they lost access to debt
markets. The crisis had worldwide repercussions, with MF Global Holdings Ltd.,
the New York firm led by Jon Corzine, collapsing when the extent of its bets on
European debt became known.
Investor
appetite for European government bonds is returning as the region’s most-indebted
peripheral economies show signs of recovery. Ireland, which had its fastest
growth since 2011 in the third quarter, raised 3.75 billion euros ($5.1
billion) from a 10-year bond sale this week as it came back to financial
markets after exiting its bailout program.
Falling
Yields
Yields on
Ireland’s benchmark 10-year bonds fell as low as 3.25 percent on Jan. 7, the
least since January 2006. The extra yield investors receive for holding the
securities instead of benchmark German bunds narrowed to 1.35 percentage points
from a high of more than 11.5 percentage points on July 2011.
Portugal is
now trying to regain full access to debt markets, with the end of its own 78
billion-euro rescue program from the European Union and International Monetary
Fund approaching in June. The nation said yesterday it appointed banks to
manage the sale of additional 4.75 percent securities maturing in June 2019 “in
the near future.” The securities may be priced to yield about 340 basis points
above the mid-swap rate, a person familiar with the matter said today.
The rate on
4.45 percent Portuguese securities due in June 2018 was at 4.09 percent at 8:29
a.m. London time today, after dropping to 3.91 percent yesterday, the lowest
for a benchmark five-year note since 2010.
Sluggish
Growth
“We’ve seen
a meaningful tightening in the periphery and it feels as though that trade
still has further to run,” said Mark Dowding, a money manager at London-based
BlueBay Asset Management LLP, which oversees $56 billion including Portuguese,
Spanish and Italian bonds. “Generally we are playing the periphery from the
long-side.” A long position is a bet an asset price will rise.
Europe
isn’t in the clear yet. The euro zone’s economy will probably grow 1 percent
this year, compared with 2.6 percent for the U.S., according to surveys of
analysts by Bloomberg News. The jobless rate has climbed to about 12 percent
from 7.3 percent in 2008.
“In the
last 24 months there has been a progressive reduction in the perception of risk
among investors and we are gradually moving from fear to greed,” said Jacopo
Ceccatelli, a London-based partner who manages 2.2 billion euros at financial
advisory and asset management firm JCI Capital. “The reduction in the risk
perception, and this sort of market euphoria, is leading to a re-rating of
sectors and countries most penalized during the sovereign debt crisis.”
Default
Swaps
The euro,
now the currency for 18 nations, rose against all but one of its 16 major
counterparts last year as the region’s economy emerged from its longest
recession on record. It bought $1.3603 today, after touching a two-year high of
$1.3893 on Dec. 27.
As investor
confidence builds, corporate credit risk in the euro region is falling. The
Markit iTraxx Europe index of credit-default swaps dropped this week to the
lowest since January 2010, while the Markit iTraxx Crossover Index of swaps on
high-yield companies declined to the lowest since 2007.
In the bond
market, banks are paying less to borrow than industrial companies, with average
yields about 4.5 basis points lower than the broader market. That’s down from a
premium of as much as 70 basis points in November 2011, Bloomberg data show.
The average yield investors demand to hold bonds from
financial companies in Spain and other nations from Europe’s periphery dropped
nine basis points in the past week to a record 2.62 percent, based on Bank of
America Merrill Lynch indexes.
‘Pretty Long’
“We’ve seen increased interest in Europe out of the U.S. as
people play the recovery story in Europe, and the European periphery in
particular,” said Michael Hampden-Turner, an analyst at Citigroup Inc. in
London. “Everybody’s pretty long and risk appetite remains strong.”
Europe’s lenders are among those benefiting from the rally
in sovereign bonds, through their ownership of the securities. Banks in the
Stoxx 600 index jumped 2.9 percent on Jan. 7, the most since July, as Ireland
returned to the market.
Spanish and Portuguese banks have posted some of the largest
increases among European shares this year. Banco Popular Espanol SA rallied 23
percent through yesterday, the most in the Stoxx 600, and Lisbon’s Banco
Espirito Santo SA jumped 16 percent. Bank of Ireland Plc climbed 15 percent.
Among the 10 biggest winners in the Stoxx 600, five were banks, data compiled
by Bloomberg show.
Italian banks, which bought government bonds with three-year
loans they obtained from the ECB in 2011 and 2012, are the biggest holders of
the country’s sovereign debt.
‘Self Help’
Banca Monte dei Paschi di Siena SpA, Italy’s biggest holder
of Italian bonds relative to its tangible equity, climbed 6.3 percent this
year. The Italian bailed-out bank holds 26 billion euros in government bonds,
more than three times its tangible capital. UniCredit SpA has jumped 10 percent.
“There’s clearly a recovery trade going on,” said Robert
Smalley, Global Financials Analyst and head of the credit desk analyst group at
UBS AG in New York. “European banks have been operating a self-help policy in
preparation for the asset quality review.”
Draghi’s Pledge
The availability of funding is giving companies with
excessive debt loads more time to restructure. Leveraged loan issuance in
Europe surged 44 percent last year, with companies borrowing 56 billion euros
of the debt, the most since 2007, according to data compiled by Bloomberg.
Billionaires Bill Gates and George Soros have bought stakes
in Fomento de Construcciones y Contratas SA, the money-losing Spanish builder
that said in November it has about 6 billion euros of debt. The company said
yesterday that 95 percent of its lenders agreed to extend its loans for two
months as it works to refinance the debt.
The rally’s roots can be traced to July 26, 2012, when
Draghi pledged to do “whatever it takes” to protect the region from the
unfolding debt crisis. The ECB went on to cut its benchmark interest rate to a
record 0.25 percent in November to support the recovery. Policy makers will
hold it at that level today, according to all 51 analysts surveyed by
Bloomberg.
Greek Profit
Buying Greek bonds the day of Draghi’s comments would have
earned investors a 370 percent return, based on the Bloomberg Greece Sovereign
Bond Index. (BGRE) Ireland’s earned 27 percent and Portugal’s 42 percent, while
U.S. Treasuries lost 3.9 percent.
BlackRock, the world’s biggest money manager, is betting on
more gains. The firm said last month it supported peripheral bonds with
positions in Portugal, Slovenia, Ireland and Italy. Franklin Templeton is one
of the biggest holders of Irish debt, according to data compiled by Bloomberg.
Buoyed by the recovery in debt markets and with his
government predicting Greece will return to growth this year for the first time
since 2007, Greek Finance Minister Yannis Stournaras said yesterday the nation
may sell five-year notes in the second half of the year.
The step would mark Greece’s return to bond markets since
being shut out in early 2010 following alarm about the size of its budget
deficit. Yields on the nation’s 10-year debt fell as low as 7.63 percent
yesterday, the least since May 2010, and down from a peak of more than 44
percent in March 2012.
“People are generally upbeat and are looking toward further
spread tightening,” said AllianceBernstein’s Loughney. “Fundamentally there are
still significant issues but it looks as though the ECB’s friendly stance will
continue for the foreseeable future.”
To contact the reporters on this story: Neal Armstrong in
London at narmstrong8@bloomberg.net; David Goodman in London at
dgoodman28@bloomberg.net
To contact
the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
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