Greetham buys Italian debt in expectation of ECB intervention

Fidelity’s asset allocation director Trevor Greetham has bought Italian government debt at the margin in his multi-asset portfolios in expectation of ECB intervention, after yields spiked to record highs.

Greetham, who runs Fidelity's £565m Multi-Asset Strategic, £337 Multi-Asset Growth and £29m Multi-Asset Defensive funds, said some of the policy responses in the eurozone risked worsening the crisis and remains cautiously positioned.

Nonetheless, he has a small tactical position in eurozone government debt to exploit any fall in yields.

"I do have some exposure to Italian and eurozone government bonds at the margin because spreads are so wide. The ECB will have to intervene and buy aggressively, and at that point I will probably sell," he said.

Italian 10-year bond yields have continued to spike this morning in spite of prime minister Silvio Berlusconi's pledge to step down, quickly rising to 7.4% after breaching the crucial 7% mark in early trading.

Greetham believes fears over a fresh slowdown in the global growth cycle have triggered off the latest attacks on European sovereign debt.

"People are moving away from Italian government bonds because they think if the world is slowing down, then Italy is slowing down and it becomes self-fulfilling."

The manager said the euro had turned economies into credit markets rather than sovereign bond markets because of the inflexibility of the single currency.

"The supposed cure to the problem that the euro finance ministers have put forward is more austerity and forced recapitalisation. The first gets you back to more economic weakness in the eurozone periphery, as does banks trying to raise capital because they will lend less."

"Pooled sovereignity is the only way to fix this, through the likes of eurobonds. But growth would help - if global growth picks up that would help in the short run".

But Greetham remains convinced the greatest threat to the global economy is debt deflation.

He believes the world economy could see inflation rates move significantly lower or even negative next year - as was the case in 2008/9 - as  growth slows and commodity prices fall.

"The first half of 2012 will have a lot more people concerned about deflation rather than inflation", he said.