Undermining the single currency
Fixed interest markets worldwide have come under pressure following economic news showing a pick up in global growth. European bond yields followed the US higher and have remained weak as central bankers are demonstrating a marked inclination to act on the prospect of inflationary pressure.
Annelise Peers, fund manager at Insinger Asset Management in the Netherlands believes that these issues will be addressed and that bond yields at current level represent value: "Given an increase of close to 1.5% on long bond yields we feel that this will more than compensate for future inflation".currently Insinger has been holding cash which it will use to buy in where appropriate. Its dollar hedge has been kept at not fully hedged, as it believes the US dollar will experience further weakness.
Indocam's fixed interest team in Paris remains confident that European monetary policy will remain on hold but over the next few months, it sees an increasing expectation of tightening in the Euro Zone. This suggests that the margin for long rates to ease is diminishing. Against this, Indocam favours a scenario of stability on the European bond market, with 10 year rates remaining at a level of 4.65%.
Ashok Talukdar, European fixed income strategist at SSB Citi Asset Management says the short end of the market is factoring in three rates rises of 25bp each. This is against the background of the earlier ECB rate rises of 50bp , from which point the ECB has been sending out a message that it is now up to each country to get its act together. It is interesting in this context to see what little progress Chancellor Schroder has managed to make.
Talukdar believes European credits are looking particularly attractive at this point. There are good opportunities in this area and SSBCiti expects it to continue to develop with little correlation to the US in the short run.
Another opportunity that Talukdar expects to develop for investors in the wider Europe is in the UK, which he believes has inspired much greater confidence than the ECB is capable of doing. The hierarchy in Europe has shown an ability to undermine the single currency: "If it's not the ECB then its Germany's politicians. I think the most effective and crediblecentral bank in Europe is clearly the Bank of England." He expects an increase in demand for sovereign credit from the UK as result. "I strongly believe that the Bank of England is in a much better position because it has the two things the ECB does not have: confidence and transparency. With the Bank of England, you see the minutes and you know who voted for and against.
There are some very seasoned and substantial figures within the Monetary policy committee and I'm sure also within the ECB, but I can't comment on the political deliberations that go on within the ECB because the fact is they are not transparent."
Baring Asset Management is about to introduce a Euro Bond Fund that will be taking advantage of the increasing opportunities in the non-Government bonds in Continental Europe. It will not be taking any currency exposure outside the euro, nor will it be taking active interest rate risk exposure against its benchmark, the Lehman Brothers Euro Aggregate Index.
Incremental returns will be delivered by the selection of bond issues. The fund is well-timed in so far as the attractively wide spreads between Government and corporate bonds in Europe. It is being launched early this month.
Spreads have been steadily widening in the last few months, partly due to the increased pace of issuance (an estimated E100bn in the first half of 1999 compared with E30bn in the same period last year) and partly due to Y2K factors.
For example, investment grade issues with credit ratings of AA and A now offer yields of between 0.4% and 1% higher than Government bonds respectively. In the high yield sector, spreads are substantially wider.