Royal & SunAlliance Investments is favouring short and long-dated government bonds in the eurozone i...
Royal & SunAlliance Investments is favouring short and long-dated government bonds in the eurozone in the belief yields are set to fall.
The group is forecasting that benchmark eurozone 10-year yields will fall from 5.29% to 5.2% in 12 months time and that interest rates in the eurozone will remain at 4.25%. Royal & SunAlliance Investments believes bond markets are being too pessimistic about the inflation outlook in the eurozone and yields will start to fall once the markets realise inflation is set to remain low.
Dave Hooker, investment manager, fixed interest at Royal & SunAlliance Investments, says: "The risk is on the upside for interest rates as we have seen strong economic growth in the eurozone in the first quarter of this year.
"There are concerns over the spike in the oil price and that this will feed through into inflation in the eurozone.
"We feel this fear is misplaced, although there may be a blip in the inflation figures. Over the longer term, we feel the fundamentals in Euroland are good and core inflation will remain low. Bond yields should fall from around the end of this year to the middle of 2001. The market believes inflation is deteriorating but we are not concerned about that and we think the European Central Bank (ECB) will continue to look at the fundamentals."
Standard Life Investments is neutral to short in terms of duration in eurozone government bonds and believes that the ECB made a pre-emptive move to tackle inflation when it raised interest rates by 50 basis points earlier this year. Alix Stewart, investment director, fixed interest at Standard Life Investments, adds the ECB has indicated it may leave interest rates on hold until September.
She says: "Our view is that in the market the interest rate rises were priced in. One factor affecting the potential supply will be the revenue from the auction for mobile phone licences coming through.
"There seems to be the belief that the European government bond market will become similar to the US and UK where government bonds are becoming increasingly rare. I have heard one figure which suggests the German mobile phone licence auction could yield E50bn in revenue. But European governments will not necessarily use this to buy back debt as many of them are currently running deficits."
Hooker agrees the supply of eurozone bonds is set to slow down with European governments raising revenue from selling mobile phone licences.
Stewart is also cautious on the short-term outlook for eurozone government bonds as around E18.3bn in eurozone bonds is coming to the market which she believes may negatively impact on yields in the short term. Royal & SunAlliance Investments is favouring eurozone bonds with a duration of five years or less in the belief these will benefit from the unwinding of inflationary expectations.
Five-year German bunds currently offer a yield of 5.1% which the group expects to fall below 5% in 12 months time. The firm is also favouring 30 year eurozone bonds on the back of a favourable demand and supply picture.
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