Reports of the latest rescue effort by the European Central Bank could be a bullish sign for certain European sovereign debt, according to Robert Tipp, chief investment strategist of fixed income at Prudential Financial Inc., which manages $270 billion in fixed-income assets.
“This is a good sign that they have resolve and are continuing to work things out,” Mr. Tipp said of reports that the ECB is expected to roll out a three-part strategy to help shore up the balance sheets of some of the more troubled eurozone countries.
He said he understands that ECB president Mario Draghi on Thursday will lay out a “three-handed deal” involving the ECB and several of the 17 eurozone nations' buying Spanish short-term sovereign debt, and a commitment from Spain to follow a strict austerity plan.
Mr. Tipp said he was most encouraged by the use of the word “unlimited” in references to the ECB's plan.
“The ECB will not stand down until they get the effect they're looking for, and the key word here is 'unlimited,' ” he said. “This is good news, because Europe is realizing the chickens are coming home to roost, and if they want to work this out they have to hunker down.”
But even as European leaders finally come to grips with the serious problems facing the continent, Mr. Tipp warned that the recovery will be anything but linear.
“It will take days, weeks and months, and there will be fluctuations,” he said, acknowledging that he “turned very positive on the euro a month ago” and is overweighting government bonds from Spain, Portugal, Italy and Ireland.
In the Prudential Global Total Return Fund Ticker:(GTRAX), Mr. Tipp has a 32% weighting in Europe, compared with 23% by the benchmark Barclays Aggregate Bond Index.
“In a world where yields are really low, a lot of those countries represent very attractive opportunities,” he said.
Yields are 6.4% on the 10-year Spanish government bond and 5.5% on 10-year Italian bonds.
By comparison, the average yield on 10-year single-B rated U.S. corporate debt is 6.7%.
“Mario Draghi is pointing out that rates are too high in these countries and that they need to be low across Europe, not just in Germany and the Netherlands,” Mr. Tipp said. “They are holding out a carrot of supporting the bond markets and bringing down borrowing costs in exchange.”
Mr. Tipp added that Spain will be the first country to benefit from the ECB's strategy, most likely followed by similar plans for Italy, Portugal and Ireland.
“Greece is still in the intensive care unit,” he added.
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