A two-year rally in the debt of struggling euro zone countries may have defied all sense and logic given the weak fundamentals of these so-called peripheral nations. Now the popular trade may have come to an end.
Goldman Sachs, in a flurry of action from its rate strategists on Tuesday afternoon, announced that the "peripheral" theme had finished and it was turning neutral on its sovereign debt. It now predicts that the interest rates from bonds of countries like Italy, Portugal and Spain will move higher along with Europe's core as euro zone inflation begins to "bottom-out" and U.S. yields pick up.
"Given our strategic view on core bonds, we expect EMU ((European Economic and Monetary Union) peripheral yields to increase in coming months and the curves to steepen alongside the Bund curve," the team, led by Chief Interest-Rate Strategist Francesco Garzarelli, said in Tuesday's research note.
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This rally can be traced back to the "whatever it takes" speech by Mario Draghi, the president of the European Central Bank, in July 2012. Draghi effectively backstopped the region and diminished fears of a euro zone breakup. His dovish words since and a series policy moves - some real and some just implied - have helped peripheral debt to cool down from the red hot levels seen at the height of the sovereign debt crisis of 2011 and 2012.