The bond markets of European countries planning to join the euro are attracting increased interest o...
The bond markets of European countries planning to join the euro are attracting increased interest on the back of convergence plays.
The markets can remember the huge fall in yields when countries such as Spain and Italy lined up to join, and are now favouring Greece, which could soon be part of Emu.
Other potential plays on this theme include Sweden, where the bonds have been rallying recently, and Denmark, although there is less certainty in these countries as referendums on entry must be held first.
Denmark faces a referendum on Emu entry on 28 September, and this is creating uncertainty in the market as the result is likely to be a close call.
Lionel Oster, fixed interest fund manager at Foreign & Colonial, does not favour the Swedish government bond market as believes it is difficult to see significant upside from current levels.
Swedish government bonds are yielding 20 basis points over Bunds on a yield of 5.44% at the 10-year area of the curve.
Oster says: "The economy in Sweden has been benefiting from recovery in Asia and strong growth in Europe.
"There is also strong domestic demand which is expected to continue.
"There were fears that inflation would pick up in Sweden and that the Swedish currency was weak against the US dollar, but there has been monetary tightening."
Oster prefers the Greek government bond market where he has holdings towards the long end, including 10-year and 15-year issues. The 10-year is yielding 6.18% compared with 6.25% five years further out.
Greek government finances have seen a significant improvement as the country looks to prepare itself for euro entry; the fiscal deficit for 1999 was 2% compared with 10% the previous year.
Inflation in Greece has also fallen to around 1.6% from double digit levels, representing another positive for markets.
Oster says that if Greece joins the euro, there is the potential for government bond yields falling from their current spread over Bunds of 90 basis points.
Geoff Lunt, fixed interest investment manager at Investec Guinness Flight, believes the spread between Greek bonds and Bunds is likely to narrow by the end of the year to 50 or 60 basis points.
Lunt is not currently invested in Greek bonds but is considering returning to investment in the five- and 10-year areas of the curve where he believes yields are likely to fall fastest.
Five-year Greek bonds are now yielding 6.07%. He adds: "The economy in Sweden is powering ahead, and the bond market has done extremely well and is trading through some of the euroland bond markets such as Belgium, Spain and Italy.
Swedish bonds are 15 basis points over 10-year Bunds, Italy is 29 over while Spain is 22 over."
Lunt is not invested in the Swedish bond market, seeing little further upside.
Lunt is also holding short-dated Danish government bonds, with the five-year bonds yielding 5.46%.
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