The current turmoil surrounding European sovereign debt is part of a new cycle that investors will have to learn to navigate, according to Kristin Ceva, manager of the $680 million Payden Emerging Markets Bond Fund Ticker:(PYEMX).
“We’ll be passing through periods like this at least until we get some structural changes,” she said.
The $116 billion bailout of Ireland’s big banks, which highlighted the instability of several peripheral European countries, reintroduced the “risk-off trade,” Ms. Ceva added.
That more cautious mood, which goes against the efforts of the Federal Reserve Board’s $600 billion second round of quantitative easing, has led to some overselling, she said.
“There has been some throwing the baby out with the bath water, and that could lead to some buying opportunities,” she said.
In the meantime, Ms. Ceva will be watching for a European version of quantitative easing, although it’s not clear when an official announcement might be made along those lines.
“Certainly, there is a view that there needs to be something done in Europe to contain the contagion,” she said.
The spreading risk can be measured by 10-year sovereign debt among the least stable eurozone countries.
Greece and Ireland, both of which are already receiving some kind of bailout, have seen their bond yields swell to 11.5% and 9%, respectively.
But Portugal is now at 6.7%, Spain at 5.5% and Italy at 4.6%.
Not only are the yields rising, implying greater risk of default, but the spreads are widening between the 2.6% yields on comparable German bonds, which generally are considered the most secure eurozone debt.
“At this point, people are mostly concerned about Spain, because Portugal is very small,” Ms. Ceva said. “I think investors want to start seeing some labor and pension reforms in Spain.”
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