Aegon's Snowden: Italy could be next Northern Rock

Aegon Asset Management's new hire, Stephen Snowden, has warned the Italian bond market could face a Northern Rock-style collapse if investor sentiment weakens further.

Snowden, poised to take over on the group's Investment Grade Bond and Investment Grade Global Bond funds from co-head of fixed income David Roberts, warned investors against picking up Italian debt following the spike in yields, adding Italy's bond market is already 'uninvestable.'

"The Italian government bond market will be no different to Northern Rock if confidence disappears," he said.

"With the burden of debt Italy has, and given this is about fear, people will not buy more now, and if you do you are signing your own resignation letter."

Snowden's extremely pessimistic outlook has prompted him and the fixed interest team at Aegon to slash weightings to financials to protect against the sell-off now being seen.

He has cut exposure in the Investment Grade fund from 28% to 21%, as well as introducing a 10% derivative overlay, after the team feared a sell-off.

"I felt the exposure to financials was wrong when I came in as it underperforms in a sell-off," he said.

Snowden added the credit markets remain "susbstantially broken" at present, with a lack of liquidity which harked back to the crash of 2008.

"The danger of a massive event has increased, and therefore you want to run with less risk," he said.

"We have taken action, and I cannot see why you would buy back in yet, as market conditions are approaching those of Lehmans in 2008."

Meanwhile the manager said UK gilt yields could remain at historic lows for years to come and could sink further despite rising inflation.

Snowden said gilt yields could test new lows if an era of financial repression ensued.

"We have not seen this period of negative real interest rates for years but it was prevalent between 1945-1980," he said.

"It is just a long term way of taking money from savers and giving it to borrowers, and in this scenario yields on gilts could stay low, despite high inflation, for many years."

The UK's move to deal with its deficit problem head on has already caused investors to flock to gilts, pushing yields down to record lows on the benchmark 10-year gilt.

Snowden said he expects this trend to continue, with gilts in a 'positive cycle' and further record lows on the cards.

"If you subscribe to the financial repression argument, then gilts stay abnormally low, and this could go further," he said.