Bluebay bond manager Mark Dowding has sold German bunds in order to buy Spanish debt in wake of the Spanish economy ‘turning a corner’, the Citywire AAA-rated manager told Citywire Global.
In early July, Dowding took an underweight position in German bunds in order to go overweight the benchmark in Spanish debt and has maintained the position since.
'Spain is the one ahead of its funding schedule and we expect Spanish spreads relative to Italian bonds to narrow', said Dowding, adding that risks of a downgrade will weaken as the economy 'turns a corner'.
Dowding, who co-manages the Bluebay Investment Grade Euro Government Bond alongside Raphael Robelin, is also overweight Italy and Slovenia and expects a Spanish recovery to boost an outperformance of the country's debt compared to Italy's in the second part of the year.
Although the supply of Germany bunds is expected to drop next year as its government policies lean towards fiscal tightening, Dowding does not believe that less issuance will have an immediate impact on the price of German bunds, whose yields have risen in past weeks on more optimistic sentiment.
Italy and Spain met their funding targets in July, allowing both countries to cancel mid-August auctions and as such saw the countries' bonds find support in reduced supply pressure.
Alongside better data from the euro area, peripheral bonds have since been boosted by a more risk-on sentiment in the markets with the yield on Spanish 10-year bonds on Monday trading at its tightest spread to German bonds in two years.
Cautious on data optimism
The bond manager also reacted to recent PMI data from July which came in above expectations, exceeding the crucial 50 mark, and indicates a return to growth for the euro area.
'I think it's very bold and premature to say that at the end of the year, the European economy will be stronger. I'm very wary of talks of the PMI index going from 50 to 60 in the foreseeable future,’ Dowding said.
'The periphery needs to grow if we are to see rebalances. What we have at the moment is a pattern of data that things are not getting worse - the market is very much taking the case of no news is good news.'
On France's government debt, which is still traded as a 'core' asset in the eurozone, Dowding says the team holds a neutral stance to the benchmark.
In the last two years to the end of July, the Bluebay Investment Grade Euro Government Bond fund returned 24.3%. Its benchmark, the EuroMTS Global index rose 14.78% in the same period.