Fixed income fund managers are generally unexcited about the prospects for European bonds, seeing be...
Fixed income fund managers are generally unexcited about the prospects for European bonds, seeing better opportunities in the US and the UK.
Geoffrey Lunt, fund manager for the Investec Asset Management European Bond fund, a e40m fund that is part of a Guernsey-based umbrella structure, says: "The interest rate cycle in Europe has still some way to go before it peaks. In the US and the UK, the top is nearer."
GDP growth in Europe is accelerating along with inflation and the European Central Bank (ECB) is faced with inflation rates well above the 2% ceiling it has imposed upon itself.
Lunt believes observers expecting just another 50 basis point (bps) hike by year end, from the present 4.25% are rather complacent. In his view, the ECB will continue to raise rates for another eight to 10 months and expects interest rates to go above 5% before they head back down.
Another problem facing the European bond market centres around the euro. Lunt says: "Not only does a weak euro make investors less willing to buy into European assets, it also adds to the inflation worries."
The Investec fund has no investments in corporate bonds, although it does hold 15% in non-government bonds such as those issued by sovereigns and supranationals.
The portfolio has a neutral position against the benchmark, although it is skewed towards the long end of the yield curve with balancing cash positions.
"We like the 30-year bonds as this is where the supply is being cut back as government finances improve," Lunt says.
The fund holds positions in Greek government bonds which are expected to continue to benefit from convergence. It also holds short-dated Norwegian bonds which are yielding as much as 150bps over other European bonds.
François Morrison, fund manager for the INVESCO GT European Bond fund, a e417m Luxembourg-based vehicle, is also cautious and has positioned his portfolio to have a duration slightly less than that of the SalomonSmithBarney European Government Bond Index. The fund is underweight gilts.
Morrison says: "We hold 9% in gilts against 14% for the index, a reflection of our view on the euro/sterling interest rates rather than a reflection of our view on UK gilts. The cost of hedging the currency would not make it worthwhile."
Like Lunt, Morrison is holding a position in Greek bonds because of convergence. He also has exposure to Danish bonds but says he may review that in the wake of the upcoming referendum in Denmark on European integration. He also favours the two extreme ends of the yield curve, mainly because of supply reasons.
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