Europe’s Periphery Deaf to Brexit Warnings, AGI’s Riddell Says

One of the asset classes most vulnerable to the shock of Britain potentially leaving the European Union isn’t hearing the alarms, according to Allianz Global Investor’s sterling fund manager.

Peripheral euro-area government bonds are underpricing the risks of a Brexit, said Mike Riddell, the London-based money manager. Italian 10-year bond yields offered a premium of 136 basis points over similar-maturity German bunds Monday. Should Britain vote to stay in the world’s largest trading bloc, the spread could narrow to 115 basis points, but if the nation leaves, there is no limit to the potential widening, Riddell said. Betting on declines in Italian bonds is the most obvious way to trade this risk, he said.

“If the U.K. voted to leave the EU, as the second largest economy in Europe, then that does not send a good signal for the future of project Europe,” said Riddell. “If you think it’s political will that’s keeping the euro zone together then you can understand why peripheral government bonds would come under pressure. Within the fund, I don’t think you are being paid enough yield to compensate you for these risks.”