Pimco, BlueBay score political win by buying Catalonia bonds

Bloomberg

For proof that taking on political risk is a winning formula in Europe this year, look no further than Pimco’s wager on Spanish unity.
The California fund manager has amassed the largest position of Catalonia’s $6 billion of junk-rated debt, undeterred by a raucous independence movement and a snap election next month that may produce another victory for separatist candidates. Betting the region will mend its divisions has produced only market-beating returns since October 10, when ousted Catalan leader Carles Puigdemont backed away from his bid for independence.
BlueBay Asset Management LLP, one of the owners of Catalonia’s February 2020 bond, expects the yield margin Catalonia pays on the notes relative to Spain to halve to 100 basis points a year from now. The obligations have returned 3.4 percent since Oct. 10, outperforming the 0.74 percent gain in a Bank of America Merrill Lynch index of euro-denominated quasi-government debt. “We’re bullish,” Kaspar Hense, who helps manage BlueBay’s $57 billion, said in an interview in London. “The chance of independence is very small, and overpriced.”
Geopolitics was cited as the No. 1 short-to-medium term risk to the global economy, according to a survey of UK institutional investors conducted by PineBridge Investments. Yet ignoring headlines about threats to the euro area from populism has been the key to stock-picking this year.
On an aggregate basis, Pimco held 8.3 percent of the Catalonia’s bonds across all maturities, BlueBay had 2.7 percent and Nordea Bank AB held 5.9 percent, according to the most recent filings compiled by Bloomberg. Pimco increased its stake in the February 2020 bond by 17 percent over the past eight reported quarters, while BlueBay boosted its holdings by 27 percent.
Spokesmen for Pacific Investment Management Co. LLC, known as Pimco, and Nordea declined to comment on their positions. It’s not the first time Pimco has bet on separatist politics and won. Quebec provided the firm with an opportunity in 2014, when fund manager Ed Devlin pocketed gains on the province’s bonds in the expectation the breakaway movement would lose momentum.
Catalan tensions may be reprised soon. An election on December 21 might re-energize the independence movement in Spain’s largest regional economy, potentially rocking Europe’s political establishment. The uncertainty has prompted BlueBay to unload some of its holdings during the rally that followed the defeat and flight to Belgium of Catalan leader Puigdemont.
“We’ve reduced a bit and are somewhat cautious into the election, because we think it will be a close race,” BlueBay’s Hense said. “But we don’t expect full independence to come.” An opinion poll published Nov. 19 showed Catalan secessionist forces on track to win 68-71 seats in parliament, maintaining their majority, though down from 70-73 seats in an October poll.
“There’s still a lot of risk,” Charles St-Arnaud, an investment strategist at Lombard Odier Asset Management in London, said by phone.