Business as usual in Austria
Aside from the political turmoil going on inside Austria, and indeed the tremors it is creating in the rest of the world, it appears to be business as usual for the Austrian government bond market (AGBM). The AGBM is currently worth about E61bn, making up just less than 3% of outstanding Euro-zone government debt. With a budget deficit of only 2% GDP and the debt to GDP ratio set to fall below the 60% Maastricht limit this year, the Austrian Republic enjoys a AAA rating, although it is currently on credit watch after the political turmoils.
Austrian government bonds are, however, excluded from JP Morgan’s government bond indices on the basis of its small size, and the lack of sufficiently big, liquid individual issues, and thus is not a natural part of many global investors’ universe. Accordingly, Bob Galesloot, senior fund manager at Robeco Group, goes on to say that this certainly does not help the market in terms of its attractiveness and adds, “Austrian government bonds are definitely not our instrument of choice when it comes to changing the interest rate exposure of our portfolios.”
Austrian domestic government bonds are sometimes held, but as Galesloot points out, “These (positions) would be very small in comparison to our other bond holdings.” He says that the group would consider buying Austrian bonds if they had widened significantly versus Bunds, but at current spreads of 20-30 bps they were not sufficiently attractive.
The managers at Clariden agree that Austrian bonds do not hold any attraction for them, saying: “It is an illiquid market and things have got much worse as the political worries have increased. We just do not have reasons to buy Austrian governments – especially if the yield pick up is only 25-30 bps over Bunds. That is not a high enough premium for us to enter this market.”
By the same token, the traditional buyers of domestic Austrian bonds see few reasons for selling up and moving into other European government bonds. According to Axel Sima, fund manager at the Viennese branch of insurance giant Generali, EMU has not changed investment philosophy significantly. He continues, “No, bond investors have pretty much stuck to their practices pre-EMU. Where it has brought change is on the equity side, and there has been a considerable broadening of geographical investment scope.” In much the same way that foreigners are ignoring Austrian bonds, Sima points out, “Why should we switch out of our 10-year government bonds, with a 27 bps spread, and into say OAT’s yielding 12 bps less?” Sima argues that the introduction of the Euro per se has had little effect on the workings of the bond market. He adds, ‘Turnover does not seem to have been affected, and the broking community is still the same. As for liquidity, it too has neither increased nor deteriorated over the past 12-months. Over the last 10 years, however then yes, liquidity has improved dramatically.”
At Capital Invest, the asset management arm of Bank Austria, the appetite for Austrian government bonds appears to be stable. Volker Steinberger, head of fixed income agrees with his counterparts at Generali when they talk about the lack of reasons for selling up in Austria and switching into other government bonds. He adds, “Aside from the political problems which are indeed upsetting the smooth running of the market, the market functions very well for all our needs. What changes should the central bank be carrying out? I understand why comparisons should be drawn between our market and the other smaller European markets such as Ireland or Portugal for example but to be the market is working well enough without needing to be ‘fixed’.”
For many Austrian-domiciled investors, it seems that EMU has not triggered any significant change in the working practices on either the buy side or the sell side. Rather they suggest that the most noticeable change has been the increasing awareness of non-Government bonds rather than non-Austrian Government bonds in the present low yield environment. Indeed Capital Invest successfully launched a bond funds investing in investment grade bonds and invests in corporate names right across the Eurozone. Caroline Hay