Long-dated government bonds in the eurozone are attracting attention as more Europeans reach retirem...
Long-dated government bonds in the eurozone are attracting attention as more Europeans reach retirement.
Government bonds in Euroland are typically yielding 5.68% at the 30 year end of the curve and Royal & SunAlliance Investment Management forecasts this will fall to 5.65% by the end of the year.
The group believes in the long term demand for government bonds in Europe will rise with an ageing population looking to fund retirement. European governments are increasingly realising they need to shift more of the pensions provision burden onto funded private sector schemes if they are to maintain fiscal discipline, which will similarly boost demand for government bonds.
Dave Hooker, fixed interest fund manager at Royal & SunAlliance, says supply of government bonds in the eurozone is set to fall against a background of improving economic growth.
The group forecasts GDP growth of 3.5% for Europe this year and 3.2% for 2001. Hooker says predicting this will lead to increased government tax revenues and less need for governments to issue debt. He expects there to be a demand/supply imbalance in the eurozone government bond market similar to the imbalance that has developed in the UK, which has led to falling yields at the long end.
Royal & SunAlliance forecasts the yield on 10 year bonds in Euroland will fall to 5.30% by the year end from the current level of 5.32%
Hooker adds: "We are looking for economic growth in Europe to continue to be robust, particularly this year and the risks are on the upside for growth. The consumer fundamentals and the fact the euro is weak should be very good for growth. We will also see the European Central Bank raise interest rates and we forecast rates will go up to 4% by the year end and to 4.25% during the first quarter of next year. Inflation is also not a problem as it is subdued globally and the recent uptick was due to the rise in the price of oil."
David Cryer, director of fixed interest at Clerical Medical, is also favouring 30 year bonds in the eurozone as well as shorter dated issues. The group is slightly long of the benchmark duration of 5.4 years.
One year eurozone bonds are yielding 4.5% and three year issues are yielding 4.8%. Cryer has been looking at boosting his weighting in eurozone government bonds from neutral to overweight but is concerned about the weakness of the euro.
He believes the European Central Bank (ECB) is not showing enough signs of support for the currency. The euro has fallen by 20% against the dollar since it was launched in January 1999, making the region's goods cheaper on world markets, which has helped exporters. The ECB has increased interest rates three times since last November to the current rate of 3.5%.
Hooker adds: "The wild card at the moment is how the ECB reacts to the weakness of the euro - it could be the case that rates go up more quickly and to higher levels than we are forecasting."
The euro fell to a record low against the dollar on 25 April with the currency trading at 93.49 US cents compared with 94.03 cents on 24 April. Its previous record low was on 20 April when it hit 93.54 cents.
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