Barclays Capital is favouring the euro bond markets as it feels they are starting to look good val...
Barclays Capital is favouring the euro bond markets as it feels they are starting to look good value.
John Maskell, a strategist with Barclays Capital, says the group is slightly long versus the euro government bond indices, reflecting its view that the markets are looking oversold. The group sees the current environment as similar to that at the end of 1992, when the Fed had stopped cutting rates, causing a large yield increase on shorter-dated paper.
He says: 'This back-up then turned into a low inflation trend-led rally in bond markets throughout most of the next 10 months.'
Another reason, he says, that the market may be better behaved looking ahead is that the supply outlook appears more favourable. The group is long at both the very short end of the market, two-year bonds, and at the long end, 30-year paper.
Maskell says: 'Our very long-term view is that the European curve should be steeper than that in the US because of relatively higher budget deficits, higher unemployment, smaller pension funds, a younger population and smaller holdings of equities.'
Barclays Capital favours Italian bonds, especially at the long end, and the Netherlands closer to the short end. The group is short on German bonds due to political instability it sees in the country, and short on France. Maskell notes: 'France looks slightly expensive in the belly of curve and will contribute to the glut of five-year supply with new issuance. The French funding target has been boosted to E91.5bn to allow for buybacks and the planned gross issuance for next year is E89bn.'
He adds that the group is neutral on Belgium and Spain both of which should see reduced bond issuance during 2002.
Barclays Capital's three-month forecasts are now 3.2%, 3.95%, 4.5% and 5.1% for two-, five-, 10- and 30-year bonds respectively.
Mike Lenhoff, chief portfolio strategist at Gerrard, says European bonds turned around over the week to 16 November, following the lead from US Treasuries. Ten-year German yields climbed from 4.3% to 4.6% on the back of increasing optimism that the US economy could be on the mend, the success of the coalition forces in Afghanistan and the fall in oil prices, he adds. Although the latter should help improve the inflation outlook, it will, if sustained, provide a considerable boost for purchasing power.
Data released in the eurozone has been disappointing, notes Lenhoff, with industrial production in France and Italy falling in September by 0.9% and 0.8% respectively.
Meanwhile, a recent survey has shown French companies expecting to scale back their investment plans for 2002. The European Central Bank in its November bulletin acknowledged the risk that the economy may shrink in the fourth quarter but expressed confidence that an economic recovery would start next year.
Lenhoff says: 'Money markets are now more cautious about the scope for further policy easing but this view could quickly change, particularly if the newsflow in the US deteriorates once again. Bonds could retreat a little further but remain attractive on a medium-term view.'
German bonds are likely to rise.
Increasing optimism seen in markets.
Euro government bonds seen oversold.
Money markets now cautious.
Much depends on US recovery.
Too much issuance in France.
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