Biggest Bond Buyers Favor European Notes as ECB Cuts
BlackRockInc., Schroder Investment Management and Standard Life InvestmentsLtd., which together oversee $1.6 trillion, are buying German debtsecurities even though yields are close to record lows. BarclaysCapital, the top primary dealer of German debt, says bunds offer“unprecedented value” because the ECB will accelerate rate cuts as theeconomic slump deepens.
“Itstill makes sense to be long selective markets and Europe is one ofthose,” said Michael Krautzberger, a European fund manager in London atBlackRock, which manages $1.3 trillion. “The ECB is behind the curve.”
Whilethe Fed reduced its target rate 4.25 percentage points this year to aslow as zero, and the Bank of England cut its benchmark by 3.5percentage points to 2 percent, the Frankfurt-based ECB lagged behind.
TheECB lowered the main refinancing rate by 1.5 percentage points to 2.5percent and will cut the benchmark rate 1 percentage point to 1.5percent by June, based on the median of 15 economists’ forecastscompiled by Bloomberg.
Eventhough Trichet said in a Dec. 16 speech further reductions may fail tobolster the economy as long as banks refuse to lend to each other, theECB may bring its key rate closer to the Fed’s, according to GregorMacintosh, a money manager in Edinburgh at Standard Life. The firm hasabout $265 billion in assets.
“TheEuropean economy will underperform the U.S. next year,” Macintosh said.“On a relative basis, European bonds look more attractive than the U.S.market.”
Germanbunds returned 12.1 percent this year, including price gains andreinvested interest, the most since gaining 16 percent in 1995,according to Merrill Lynch & Co. index data. French government debtreturned 11.5 percent, while Spanish bonds added 8.8 percent.
OnlyTreasuries returned more than bunds among the Group of Sevenindustrialized nations, handing investors 14.6 percent. A rally inTreasuries in the fourth quarter pushed 10-year U.S. debt yields to 89basis points below bunds of similar maturity, the lowest since 1993. Asrecently as last month they yielded 22 basis points, or 0.22 percentagepoint, more than bunds.
The spread was 81 basis points as of 11:38 a.m. today in Tokyo.
Investorspiled into the relative safety of government debt this year as creditlosses and writedowns at the world’s largest financial companiessurpassed $1 trillion and Europe, the U.S. and Japan entered theirfirst simultaneous recessions since World War II. The rally droveyields on German two-year notes down by more than 200 basis points to1.79 percent, the steepest drop since falling 268 basis points in 1995.
“Areversal of the bullish trend is unlikely to take hold before the thirdquarter of next year,” said Laurent Fransolet, head of Europeanfixed-income strategy at Barclays in London. Fransolet recommends bondsdue in five and 10 years, which he says offer “unprecedented value.”
Yieldson German 10-year notes will fall to 2.85 percent by the end of thesecond quarter from 2.93 percent last week before rising to 3.20percent at year-end 2009, according to Barclays. The London-based bankbuys more debt at German government-bonds auctions than any of theother 28 primary dealers, according to the Bundesbank.
Whileanalysts expect yields on 10-year bunds to rise to 3.4 percent by theend of 2009, investors will likely break even for the year, accordingto the median of 10 forecasts compiled by Bloomberg.
Aninvestor buying $1 million of 10-year bunds would lose about $5,000 bythe end of next year if the yield rose to the level forecast in thesurvey. That compares with the $78,000 a buyer of the same amount of10-year Treasuries would lose should the yield increase to the 3.4percent predicted in a separate Bloomberg poll of 54 strategists.
Bondsmay fall in 2009 as governments prepare to sell a record amount of debtto finance bank bailouts amid falling tax revenue, according toZurich-based UBS AG, Switzerland’s biggest bank.
Germanywill issue a record 323 billion euros ($456 billion) of debt next year,including 149 billion euros of bonds maturing in more than one year,according to the Federal Finance Agency. France plans to sell a record145 billion euros of securities.
“Thesheer amount of issuance due from European governments is likely tooverwhelm potential demand,” UBS strategists Meyrick Chapman and AndrewRowan wrote in a report to clients Dec. 18. Investors will see “thebulk of the returns” in the first half and “barely break even” in thesecond, the London-based analysts said.
Two-yearGerman note yields will rise to 2.05 percent by the end of next year,according to the median of 10 economists’ forecasts compiled byBloomberg, from 1.79 percent Dec. 26.
Theglobal credit seizure prompted the world’s biggest central banks to cutrates and offer record amounts of cash to prevent financialinstitutions from collapse following the Sept. 15 bankruptcy of LehmanBrothers Holdings Inc.
“Aquicker-than-expected return to risk appetite is a risk for bonds andcould lead to a sell-off, even though the European economy isn’t likelyto recover in the next half or one year from now,” said Michiel deBruin, who manages about $18 billion as head of European governmentbonds at F&C Asset Management’s Dutch unit in Amsterdam.
Trichetmay have no choice but to lower borrowing costs again, according toDavid Scammell, a money manager in London at Schroder, a unit of theU.K.’s largest publicly traded fund company. The economy of the 15nations sharing the euro will shrink 0.9 percent in 2009 afterexpanding 1 percent this year, based on the median of 21 forecastscompiled by Bloomberg. The U.S. is likely to contract 1 percent, aseparate poll shows.
“Pooreconomic numbers will bring them to their knees,” said Scammell, whoseparent firm oversees $19 billion of assets. “The ECB will have to cutinterest rates more aggressively. We are bullish on European bonds, asnext year is not going to be any better than this year in terms of theeconomy.”
Growingpessimism over the economy and expectations of rate reductions drovethe yield on two-year bunds to 114 basis points below 10-year bunds,creating the widest spread since 2004.
Asthe ECB brings rates closer to zero, the gap may narrow becauseinvestors will seek higher yields offered by longer- dated securities,Scammell said.
“Thecurve will flatten because there’s nowhere for the short end to goanymore, and not because of expectations of an economic recovery,” hesaid. “The U.S. led this cycle and it’s moving into a curve-flatteningmode. Europe is likely to follow.”
Read more news at - ECONOMIC NEWS ONLINE
|
|
