Schroders Shuns Treasuries and Bunds in Favor of Italian Debt

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(Bloomberg) — Asset manager Schroders is buying Italian government bonds, arguing the country has already weathered the budget and political turmoil now rattling investors in other European nations and the US.

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Dorian Carrell, head of multi-asset income at the £814 billion ($1 trillion) investment firm, has built a “significantly overweight” position in Italian debt in recent weeks, adding 10-year bonds at the expense of Treasuries as well as government debt from the biggest European economies, including Germany. 

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His rationale is that Italy, once synonymous with fiscal blowouts and near-constant political upheaval, has become more stable under Prime Minister Giorgia Meloni, while its peers, historically seen as safer, have become less so. Meloni’s government has kept deficits in check, and polls suggest it could remain in power after next year’s general election. 

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That’s helped compress the country’s 10-year bond premium over benchmark German Bunds to just 77 basis points, versus roughly 250 basis points in 2022, when Meloni’s right-wing government took office. The spread for Italian bonds, or BTPs, has continued to tighten even after the Iran war started, narrowing about 20 basis points in the past three months.

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Carrell sees that premium as “reasonable” on a relative basis, given the political and economic risks elsewhere. In Germany, support for Chancellor Friedrich Merz is plummeting amid weak economic growth, industrial decline and energy-supply challenges. In France, meanwhile, next year’s election is expected to see further gains by far-right parties.  

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“Italy actually looks quite good,” he said. “We are more worried about France and Germany politically.” 

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Investors’ fears for Italy under a Meloni government have largely failed to materialize, so “you don’t need too much for spread in our view for BTPs over bunds,” Carrell added.

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Read: One-Time Bond Pariahs Go Neck and Neck With Germany, France

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Carrell is also underweight Treasuries, given the expanding US fiscal deficit and uncertainty over the Federal Reserve’s path under new Chairman Kevin Warsh. 

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While traders are betting on one US interest-rate hike this year, Warsh is widely expected to pursue a looser monetary stance during his term at the central bank. In addition, Carrell expects the Trump administration to increase spending ahead of November’s mid-term election.

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“We see debt-to-GDP increasing at a very rapid rate and we see a central bank that doesn’t seem to have the similar view on inflation prospects as we do,” he said. 

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Treasury yields rose Monday, extending their rise from Friday, when a sharp rise in monthly payrolls pointed to a robust US jobs market. Data this week is expected to show annual inflation accelerated to 4.2% in May, with a hotter reading potentially forcing traders to add to rate-hike bets. . 

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“There’s a lot more uncertainty and therefore there’s a lot more volatility in the Treasury market,” Carrell said.

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—With assistance from Margaryta Kirakosian.

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