EUROPE - The current correlation in the bond yields of Italy and Spain is "absolutely irrational" as the countries are two completely different propositions, according to Allianz Global Investors' (AGI) head of European fixed income.

Speaking yesterday at a conference in Munich organised by AGI, European fixed income chief investment officer Franck Dixmier also highlighted the opportunities in peripheral euro-zone government debt for investors with "the guts to have some exposure".

He noted statistics that showed a number of peripheral countries within the single currency - notably Portugal and Ireland - posting record returns in the first eight months of the year.

The chart also showed Italian government debt returning more than 10%, whereas Spanish bonds resulted in a loss for investors.

He said AGI held a "very strong" conviction that there would not be a break-up of the single currency and, in light of such a conviction, Italian debt proved an attractive investment opportunity.

"It is absolutely amazing to consider the progress made in Italy over the last two years," he said. "When you add the different plans announced, you are reaching more than €250bn in fiscal impact.

He said the current correlation in the market between Spain and Italy was "absolutely irrational", noting that it was a case of two very different countries - with one posing a solvency risk and the other exposed to liquidity risk.

"Spain is a very difficult case - it is about regenerating the whole economy," he said. "It will take years and be very painful, and, today, we consider it as a bit early for us to buy Spanish debt."

This contrasted with his view of Italy, which he said should be considered a buy for long-term investors, albeit with an eye on the political situation in the country.

Dixmier also said there was "absolutely no doubt" that Spain would ask for assistance from the European Central Bank, despite the problems in selling any such bailout to the country's public.

"Our best guess is that Italy will not ask for a rescue plan - there is no need, clearly," he said.

Pointing to the fact that prime minister Mario Monti was now implementing reforms that had been postponed for decades, the Frenchman joked: "I would like to have a Monti in France."

His predictions come as Italy's borrowing costs fell further, with a targeted €7bn auction of 10 and five-year paper only selling €6.6bn, but at yields 58 and 64 basis points below a previous sale in August.

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