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AB’s Taylor: why Italian debt is attractive

AB’s Taylor: why Italian debt is attractive

Italy could emerge as a surprise bond bet for European investors if they are willing to look beyond the headline noise surrounding its banking sector.

That is according to AllianceBernstein’s John Taylor, who runs the AB Diversified Yield Plus fund at the firm.

Speaking to Citywire Selector, Taylor, who currently has 7.67% of the portfolio allocated to Italy, said the sovereign debt space in the country is a winner.

'Italy is one of the cheapest European sovereigns, as the spread to Germany has moved out to around 2%, compared to less than 1.5% for Spain.

'Historically, those two countries ‎have traded fairly close to each other. We think the extra yield premium you get for owning Italian debt versus Spanish debt is appealing.'

Taylor said political stability could be one reason spreads have widened in Italy, along with worries surrounding the banking sector.

'There have been concerns surrounding the Italian banking system‎ for some time but there have been steps taken in recent weeks which will help to start to alleviate those concerns.

'The largest bank, Unicredit, will successfully complete an equity rights issue, which will further help them to build capital. In addition, we are starting to see buyers in the form of hedge funds, stepping in and buying some of the stock of non-performing loans, which Italian banks have held on their own balance sheets for some time.'

Despite this, Taylor said Italian banks have started to respond well to these developments. ‘Italian bank bonds have started to respond favourably to these developments but Italian sovereign spreads have failed to tighten.

'This may be due to political uncertainty both domestically and elsewhere within Europe with upcoming elections in both the Netherlands and France. Italian government bond futures are being used by many investors as a way of expressing a negative view on Europe as a whole.‎’

Confident in corporates

Elsewhere, Taylor has 23.78% of the portfolio exposed to investment grade corporates and said corporate yields offer significant premium relative to government bonds.

'Corporates themselves are included in the ECB’s QE programme, so there is a bias there for spreads to tighten because of that QE demand,' he said.

'One sector which has become more favourable over the last few months is financials. This is because we have been through a period where European banks have been forced by the regulators to become safer institutions.'

Taylor said European banks have built up more capital and issued more subordinated debt to become better investments from a bond holder perspective.

'The regulatory push is coming to an end, this now means banks will then be able to pay more dividends and that bank profitability is likely to increase.

'Because we are invested in subordinated debt - which does have pretty high correlations to bank equity prices - we think it should be a favourable catalyst for subordinated bank bonds to benefit.'

The AB SICAV I-Diversified Yield Plus fund returned 5.07% in sterling terms over the three years to the end of January 2017.

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