(Bloomberg) -- Italy’s bonds may work out for investors in the long run, though investors may do well to look elsewhere in Europe in the meanwhile, according to HSBC Plc.
The U.K. bank is recommending that investors position for a further worsening of the relationship between populist leaders in Rome and the European Union by selling Italian bonds versus their Spanish peers. That’s because both sides are likely to drive a hard bargain, driving volatility higher, before an agreement is found.
“In the long run, we are optimistic that a compromise will be found, but the path to get there may not be smooth,” wrote Chris Attfield, a London-based fixed-income strategist at HSBC. “If the EU takes a harder line to preserve its credibility, and that of the fiscal rules, it risks a confrontation, which could lead to sanctions, political tension and possibly a rise in Euroskeptic sentiment.”
Italian bonds have held steady after S&P Global (NYSE:SPGI) Ratings and Moody’s Investors Service refrained from docking the nation to junk following the government’s plans to widen the budget deficit next year. The EU has come down on the nation’s leaders firmly, stating Thursday that their growth targets were overly ambitious and the fiscal shortfall would be wider than anticipated, putting it in breach of the bloc’s rules.
HSBC recommends entering a widening trade between Italy’s 2.8 percent bond maturing in Dec. 2028 versus Spain’s 1.4 percent bond due in July 2028, with the former offering 185 basis points more than the latter on Friday. Attfield expects the spread to widen to 210 basis points by the end of the year.
The bank’s recommendation comes after Mitsubishi UFJ Kokusai Asset Management Co., which oversees the equivalent of $115 billion, reposed its faith on Spain, saying that the “underlying story” on the nation remains positive.