‘More eurozone action needed’
Fund managers called for urgent action to contain the eurozone debt crisis, as Spain was dragged further into crisis territory last week.
The yield on Spanish 10-year government bonds reached the critical 7 per cent point last week following a Moody’s downgrade to one notch above ‘junk bond’ status.
Tom Becket, chief investment officer at PSigma Investment Management, said remaining invested and simply hoping for a resolution was a “dangerous game” and that calls for policymakers to take action showed “quite how serious the situation has once again become”.
“For some time, many commentators have argued that the European creditor countries will allow the debtor countries to go to the brink, in order to ensure that lessons are learned,” he said. “In recent weeks, it seems the brink has been reached. The time for action in Europe is now.”
Spanish economy minister Luis de Guindos last week said he was “convinced” that the country would need to take action in the coming weeks to control its fiscal situation.
Iain Stealey, international bond manager at JPMorgan Asset Management, said unemployment, rising debt levels and falling economic output were fuelling Spanish fears.
“Investors are concerned how this can be reversed without further bailouts,” he said. “Expectations for positive growth in the region have now been pushed out to 2014.”
Kathleen Brooks, research director for Europe, the Middle East and Africa at Forex.com, warned that euros were still trading in a narrow brand of prices compared with dollars in spite of the ballooning Spanish yields, which “can be a precursor to a coming storm”, she said.
David Roberts, joint head of fixed income at Kames Capital, said the Spanish crisis was even affecting the government bonds of eurozone’s largest economy Germany, which incurs greater liabilities every time there is a bailout.
Mr Roberts observed spikes in peripheral eurozone government bond yields in recent weeks tended to be accompanied by yield falls in ‘safe-haven’ German government bond markets. However, German government bond prices were little changed on the day of the Spanish downgrade and yield spike on Thursday (June 14), he said, suggesting that the safe haven trade that has dominated in recent weeks could be breaking down.
“Furthermore, the yield on German debt, which since [the collapse of] Lehman has almost always traded lower than US equivalents, now looks set to move higher.
“The only other occasion in the past three years when this was the case was November 2011,” he added.
“It may be that safe-haven status can once again be conferred on Germany. However, running that risk simply seems too great for the rational investor,” he said.
“When preservation of capital depends solely on politics and regulation, when fundamentals and valuations are at extreme levels, then selling just seems the prudent thing to do.”