The selloff in credit has cast a flattering light on Europe’s periphery.
The riskiest fringes of the euro region’s government bonds have dropped their association with corporate risk, generating discussion Wednesday.
“We were talking about it in the morning meeting,” said Luke Hickmore, senior investment manager at Aberdeen Standard Investments in Edinburgh. “The normally strong correlation between peripheral spreads and credit hasn’t been seen in the last week or so.”
Portugal, Italy, Ireland, Greece and Spain -- crassly dubbed PIIGS back in 2010 -- were close to the center of a euro crisis, when European Union member states eventually used almost 2 trillion euros to prop up lenders.
It’s “noticeable the way peripheral bond markets are behaving in the generally risk-off environment, largely ignoring the deterioration in risk sentiment elsewhere,” Societe Generale SA strategists led by Kit Juckes wrote in a note to clients Wednesday. “Fullish government coffers starve the market of bonds and peripheral spreads decouple from the wider mood.”
To be sure, even if it avoids getting caught up in the credit selloff, the euro-region’s fringe still bears economic and political risks, as seen in the separatist revolt last month in Catalonia that still simmers. After a three-year hiatus, Greece only returned to the bond markets in July and still relies on euro-area creditors and the International Monetary Fund.
“Peripherals are still a risk asset,” Hickmore said.
--With assistance from Paul Dobson
To contact the reporter on this story: Cecile Gutscher in London at cgutscher@bloomberg.net.
To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Todd White, Robert Brand
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