European sovereigns: Credit trades versus rate trades

Peripheral Europe economies are diverging and investors should think of Spanish and Italian sovereigns as a rate trade, not a credit play, explains Carmignac's Sandra Crowl.

There has been much scepticism regarding the possibility for European government yields to go lower in the foreseeable future. Around this time last year, German yields were 2%, inflation was still a concern at 1.9%, and Germany was benefiting from favourable terms of trade vis-a-vis emerging markets. Now, German 10-year bund yields are 1%, which begs the question as to whether yields are realistically indicating future inflation anticipations - and whether they can go any lower? The answer to the latter question is possibly, but differentiation is key. Greece and Portugal have cer...