Italy budget: UBS Wealth Management says to buy short dated Italian bonds

REUTERS/Dominic
Ebenbichler

• UBS Wealth Management says that the recent Italian
  budget presents a buying opportunity for investors.
• Fears of what the crisis could lead to have led to
  surging Italian bond yields and falling prices.
• CIO Mark Haefele said on Wednesday that the firm is
  investing in short term Italian government debt.
• UBS, however, warned to stay away from any Italian debt
  with a maturity of more than two years.

Amid the market panic surrounding Italy over the last
week, the chief investment officer of UBS Wealth
Management says now’s the time to buy. 

It’s a contrarian call: “We are opening an overweight
position in two-year Italian government bonds versus cash,” Mark
Haefele, who works at the
$2.4 trillion wealth management arm of the Swiss banking
giant, said on Wednesday. “The recent
sell-off presents investors with an attractive
opportunity.” 

Fears had been mounting in Italy over the brewing
budget crisis, which could set the country and its leadership on
a collision course with the European Union over excessive
spending. Bond yields soared — the country’s benchmark 10-year
bond is near its highest level since 2014.

Rising yields correspond with falling prices for bonds, and
according to one of the world’s most prominent wealth management
firms, those falling prices represent a opportunistic way
in. 

Here’s Haefele’s reasoning:  

“While we believe that Italy’s credit rating is likely to
be downgraded by one notch, the country is likely to retain an
investment grade rating for at least the next 12 months, and we
believe there is only a very low probability that Italy will
default within the next two years. Just 13% of the government’s
bonds need to be rolled over by the end of 2019, so higher yields
only gradually increase the cost of debt.”

Still, Haefele urges caution. He warns against investing in
longer-dated Italian debt, while saying investors should not
concentrate their portfolios on Italian bonds.

“There are risks associated with the position,” he
said. 
“Italian yields could be pushed higher by
escalating tensions between Italy and the European Commission, a
breakdown of the current Italian coalition, or the departure of
Finance Minister Giovanni Tria.”