Invesco Perpetual’s Paul Causer and Paul Read have allocated nearly a quarter of their £398m Tactical Bond fund to Spanish and Italian bonds in the view the countries are “too big to fail”.
Causer and Read said they are exploiting a “short-term tactical opportunity” by building up a 13.5% position in Italian government bonds and 9.2% in Spanish – taking overall exposure to 22.7%.
Half the weightings are in short-dated paper, which is set to mature in 2013, while the remaining 12% is split between 10-year Italian and 10-year Spanish bonds.
The managers have been adding to the positions since the start of May, taking 15% of cash off the table, as they are looking to profit from weak sentiment in the eurozone.
The managers do not foresee a default in either Spain or Italy, believing they are “too big to fail”, although both have suffered fallout from the sovereign debt crisis.
Italy is the world’s third largest government bond market with a significant funding calendar, and has been affected by contagion. However, the managers believe the country’s fundamentals are little changed.
Last week markets were hit by a wave of volatility, amid fears Greece is faced with no alternative but to default and subsequently this could have a significant impact on Italy and Spain.
Ten-year Italian and Spanish bond yields hit record highs since the inception of the euro, with Italian 10-year bond yields reaching 5.8%.
However, Causer and Read take the view despite weak sentiment on longer-dated bonds, short-dated bonds have been less volatile.
The managers believe eurozone peripheral government bond markets are likely to remain choppy in the absence of a significant improvement in the political response, and are looking to take advantage of market volatility.
The increased exposure to Spanish and Italian bonds mirrors a similar move made by the managers earlier this year in their £3.2bn Monthly Income Plus fund.
Causer and Paul Read trimmed high yield and credit exposure in favour of government bonds, including Spanish government debt, in the fund.
However, M&G's Richard Woolnough, manager of the £4.7bn Optimal Income fund, remains bearish on peripheral Europe, holding just 0.1% in Italian government bonds and 1.7% in Spanish bonds as he believes they can no longer be called safe.
"Following the financial crisis and problems in the eurozone, many sovereigns have gone from safe to risky and even very risky, depending on the government that is issuing them," he said.
"It is a big problem at the moment and fund managers are increasingly having to ask themselves ‘are these guys actually going to pay me back?'"
