Pacific Investment Management Co., home to the world's biggest
bond fund, is cutting holdings of Italian and Spanish government
bonds amid a sharp rally in the two markets this month.
The money-management firm has "lightened up" in the past couple
of weeks in the European debt as part of a broad reduction in
exposure to riskier assets in the fixed-income markets, said Andrew
Balls, Pimco's head of European portfolio management, in an
interview with The Wall Street Journal on Wednesday.
Mr. Balls declined to specify the dollar amount Pimco has sold
of Italy and Spain bonds. Pimco manages more than $2 trillion in
global assets.
Mr. Balls said the rally in prices of Italian and Spanish debt,
which recently sent yields on 10-year debt to their lowest levels
since 2010, was driven by liquidity from major central banks, which
has overshadowed the euro zone's economic and fiscal problems for
the moment. Yields on bonds fall when prices rise.
"This central-bank-inspired rally has made the markets more
expensive," said Mr. Balls. "Yields could go lower still in Spain
and Italy but we have sold into the rally because we remain worried
over the fundamentals in the euro zone."
Mr. Balls highlighted three risks facing the euro zone. The
European Central Bank's function of being a lender of last resort
remains untested, he said, adding that politicians in the region
have made little fresh progress toward a banking and fiscal union
over the past months, making it difficult to see the potential for
improvement in the flagging European economy.
Mr. Balls said after his recent selling, Pimco's positions in
Spanish and Italian debt in some portfolios now are "neutral to a
bit underweight," while other portfolios' exposure still remains
"neutral to a bit overweight."
Big decisions on Pimco's overall portfolio will be decided by
the company's annual meeting next month, said Mr. Balls.
He added that yields in Spain and Italy need to rise
significantly before he would consider becoming a buyer again.
Pimco still holds no sovereign bonds issued by Greece, Portugal and
Ireland even though these bonds have also rallied.
The last time Pimco made a shift in Spanish and Italian debt was
last summer when the ECB President Mario Draghi pledged to do
whatever it takes to preserve the euro currency. Pimco was among
many investors who turned bullish on Italy and Spain debt as the
10-year yield on Italian bonds tumbled from a record high above 7%
after Mr. Draghi's assurance.
Wednesday, the 10-year Italy bond yielded 4.01% while the
10-year Spanish bond yielded 4.3%.
Mr. Balls argued that major central banks' money-pumping, by
both the Federal Reserve and the Bank of Japan, has driven private
investors out of safe-haven bonds such as Treasurys and German
government debt whose yields are trading near historic lows, and
into riskier assets.
The hunger for yield has pushed up bond prices in many parts of
the global fixed-income markets, making those bonds expensive to
buy and diminishing prospective returns, said Mr. Balls.
Rallies in riskier debt along with renewed concerns about global
economic growth, have prompted Pimco to dial back exposures in
several fixed-income markets this year, said Mr. Balls. Pimco has
cut holdings of corporate bonds, including those in the U.S.
industrial and financial sectors since the start of the year.
Write to Min Zeng at min.zeng@wsj.com
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