In December of 2011 the European Central Bank (ECB) issued three-year loans at one percent interest, which were interpreted by the markets as the beginning of the end of the financial crisis in peripheral Europe, because part of the loans that the ECB gave the banks were to be used to buy public debt from ailing countries. The data now support this theory. Since December 23 the spreads between Spanish and Italian bonds with respect to the German bund have slimmed to 319 basis points and 362 basis points, respectively.
This means that those who interpreted the December stimulus as a window of opportunity for buying public debt from peripheral countries, primarily the countries that were not bailed out such as Spain and Italy, were right on target with their investments. Some fund managers belong to this group of visionaries. According to figures from Morningstar, professionals specializing in European government fixed income funds increased their exposure to Spanish and Italian debt by eight percent on average since December. This percentage translates to an increase of 2.5 billion euros. 1.8 billion of that amount is in Italian bonds and 800 million in Spanish bonds. These figures include recent fixed income acquisitions as well as yields generated on the investments since then.
No products that have increased their exposure to peripheral fixed income are being sold in Spain at this time, although they are available in Italy. For example, Fonitalia Euro Bond Medium Term has increased its exposure to Spanish fixed income by 600%, and AcomeA Eurobbligazionario A1 has increased its exposure to Italian fixed income by 200%.
The strategy is paying off. It is not an accident that the funds who have profited the most since that December 23, when the ECB announced its loan, invested more than 60% in Spanish and Italian debt.
