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"OUR STANCE FROM a year ago has been to underweight peripheral countries altogether – and in that I include France." This comment from Xavier Baraton, global CIO fixed income, CIO North America, at HSBC, may be far from revolutionary, but it sums up the extraordinary position that the SSA market now finds itself in. Sovereigns used to be the supertanker of the fixed-income markets – the risk-free trade that accounted for large proportions of asset allocation but generated slow, reliable, unspectacular beta returns. The ravages of the prolonged sovereign debt crisis that the eurozone has endured mean that those days are long gone and traditional, long-only fundamental SSA investors find themselves in a puzzling new world of wild yield swings and unpredictable volatility.
"The sovereign markets in the eurozone are now behaving like credit markets – so you now need to trade them like credit markets," advises Mark Dowding, senior portfolio manager at BlueBay Asset Management. "Eurozone SSA is now a very exciting space for active fund management," he enthuses.
But not everyone in the market is so upbeat. Peering through his fingers at his Bloomberg terminal in early August (before the European Central Bank’s resumption of its SMP programme) one US-based banker visited in his office by Euromoney recites some of the messages that have come through overnight from Italy: "Every position we have is losing money – the portfolio is paralysed!" screams one.
