What do Bill Gross, Italy, and the ECB Have in Common?

We’ve written on more than one occasion about how important it is to be cautious and conservative in today’s uncertain investment environment.

The recent interplay between Bill Gross, the Italian Government, and the European Central Bank illustrates how extremely difficult it is to invest in markets that are increasingly manipulated.

Let’s connect the dots.

New Italian Government

Just recently formed, the political party consists of the right-wing League and a coalition of Euroskeptics, or anti-EU politicians. According to CBC News, this is Western Europe’s first anti-establishment (read: anti-European Union) government which promises to return control of Italy to the country itself rather than unelected technocrats in Belgium.

This populism naturally raises concerns that Italy will create another Brexit.

European Central Bank

During the end of May, the new populist government was being formed in Italy. Over this same time period, the Bank of Italy and the ECB dramatically reduced their purchases of Italian bonds – relative to other bonds – to a level not seen since March 2015. The ECB didn’t reduce its overall net bond purchases, only those from Italy.

This reduction in Italian bond buying resulted in sharp market moves and increasing spreads.

While the ECB is supposed to be apolitical and not intervene in markets to encourage a specific political agenda, politicians in Italy believe that the Bank did just that. Despite this Italy’s new government was formed . . . and purchases of Italian bonds by the ECB returned to normal shortly thereafter.

Bill Gross

While the Italian people presumably got what they wanted with the election of their new government, it appears that the Global Unconstrained Bond Fund run by the legendary Bill Gross (the former bond king at PIMCO) was an unintended casualty in this process.

A few weeks ago the Fund lost 3% of its net asset value. While a 3% move in either direction isn’t big for stocks, it is a huge move for a conservative investment like bonds.

Interestingly, the Unconstrained Bond Fund loss of 3% wasn’t due directly to the performance of Italian bonds. Instead, the gap between U.S. and German bonds increased as investors became nervous that Italy would leave the Euro Zone. This caused investors to demand a higher yield from U.S. 10-year debt to match the yield of German debt, which in turn created a loss for the Fund.


Read Financial Times Article Read European Central Bank Article Read Bloomberg Article Read Bloomberg Article Read CBC Article