The Euroland bond market is pricing in interest rate rises, providing a buying opportunity for those...
The Euroland bond market is pricing in interest rate rises, providing a buying opportunity for those managers who do not see inflation as a problem over the next year
Joe McKenna, investment manager, fixed interest at Britannia Asset Management, believes the markets are overdoing their expectations of short-term interest rate rises, which have had the knock-on effect of pushing up short bond yields
On a 12 month view, he expects Euroland bond yields to be lower as the expectations for Euroland interest rate rises are revised down. McKenna says: "People thought the US economy would slow down and as Europe grew and the US slowed the impact on global growth would be quite relaxed
"The trouble is the US is not slowing down to the extent people thought it would and you have also got growth in Europe, the UK and Japan
"This is leading to expectations of short-term interest rate increases across the world. The interest rate forecasts out there are probably far more than you will actually see
"The short end of the market has been oversold and overdone
On a 12-month view, McKenna thinks the bond market looks reasonably good value
He says: "I believe we will see yields in the European bond market at lower levels in a year's time and they will certainly not be higher than they are at the moment but I would like to see evidence the US economy is slowing significantly before buying aggressively into bonds
"On the European curve, I would reckon the eight- to 10-ear area might be the best. You could also buy into the two to three-year area of the curve, which has been oversold, and still be long of the benchmark
Ian Fishwick, head of fixed interest at SLC Asset Management, believes interest rates are set to rise in Euroland but adds that the European Central Bank may hold off until next year
He says: "We think the long end of the Euroland government bond market represents pretty good value, esp- ecially when compared with the UK and the US. The US economy has been strong for a number of years now and there is some danger of inflation. In Europe there is no imminent danger of inflation at all
"We are keen on the longer duration stock, particularly with the yields on the middle of the curve being relatively low. These are typically around 4.4% over five years in Euroland
Two-year German bunds are currently yielding 3.5%. McKenna adds that in terms of selecting between the government issues in Euroland, he is more interested in the duration and liquidity of the bond itself than in the country of origin
McKenna holds a mixture of Euroland bonds including Dutch, German and Italian issues
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