German Bunds Lose Allure for Legal & General, Frankfurt Trust: Euro Credit
German Bunds Lose Allure for Europe Fund Managers
Michele Tantussi/Bloomberg
The German economy will expand at an annual rate of 2.55 percent in 2011, compared with the 3.6 percent projected for last year, according to Bloomberg surveys of analysts.
The German economy will expand at an annual rate of 2.55 percent in 2011, compared with the 3.6 percent projected for last year, according to Bloomberg surveys of analysts. Photographer: Michele Tantussi/Bloomberg
Jan. 4 (Bloomberg) -- Simon Ballard, a senior credit strategist at RBC Capital Markets, talks about the outlook for U.S. and European credit markets in 2011. He speaks with Andrea Catherwood on Bloomberg Television's "The Pulse." (Source: Bloomberg)
Jan. 4 (Bloomberg) -- Bob Parker, a senior advisor at Credit Suisse Asset Management, talks about China's involvement in European bond markets. He speaks with Francine Lacqua on Bloomberg Television's "On The Move." (Source: Bloomberg)
German bonds, considered among Europe’s least risky investments, are losing their luster for Legal & General Investment Management and Frankfurt Trust because of costs to rescue the region’s so-called peripheral nations and the possibility of rising interest rates.
“Our fund is looking elsewhere for a safe haven,” said Christoph Kind, head of asset allocation at Frankfurt Trust, which manages about 16 billion euros ($21 billion) for clients. Legal & General, which oversees $500 billion, favors bonds from the Netherlands and Finland, both of which have top credit rankings, to similarly rated German bonds, according to Jonathan Cloke, a money manager at the firm in London.
Germany has pledged more cash than any nation to bail out debt-ridden states such as Ireland and the country’s fixed- income market is vulnerable, assuming Deutsche Bank AG analysts are right and the European Central Bank starts to increase interest rates as soon as June.
“When you look at the whole setup, Germany seems to be the ultimate guarantor of the whole region,” said Robin Marshall, director of fixed-income at London-based Smith & Williamson Investment Management, which oversees $20 billion for customers. “You have to ask yourself why bund yields are so substantially below other countries. They aren’t fully reflecting the risk.”
The yield of the benchmark 10-year German bund will climb to 3.28 percent by the end of 2011 from an average 2.78 percent last year, according to a Bloomberg survey of 17 analysts, with the most recent forecasts given the heaviest weightings. By contrast, yields for Irish bonds of similar maturities were at 9.25 percent on Dec. 30 and the yield on 10-year Greek bonds was 12.59 percent.
Record Issuance
Germany took advantage of historically low borrowing costs to sell 312 billion euros of debt in 2010, down about 3 percent from the record issuance of 2009. Investors gobbled up bonds as they sought safety from market turmoil that led to the rescues of Ireland and Greece.
The yield on two-year German notes fell to 0.43 percent on May 20, the lowest since at least 1990 when Bloomberg started tracking the data. The country’s 10-year bond yield reached a record low of 2.087 percent in August.
German debt was the best performer last year in the euro region, after AAA rated Austria, handing investors a return of 6.3 percent, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek fixed-income securities slumped 20 percent and Irish bonds fell 14 percent. French debt climbed 5.3 percent on a total-return basis, while Italian bonds slipped 0.7 percent and Portuguese securities fell 8.1 percent.
Moody’s Downgrade
The yield on the German 10-year bund was little changed at 2.92 percent as of 2:49 p.m. in London today. Two-year note yields rose almost three basis points to 0.84 percent.
Portuguese bonds fell on Dec. 21 after Moody’s Investors Service said it may reduce the country’s credit rating “by a notch or two.” The move came four days after Moody’s cut Ireland’s rating five levels to Baa1. It also has put Spanish and Greek ratings on review.
A survey published last month by London-based Barclays Plc showed that 40 percent of respondents picked equities as their asset of choice in 2011, followed by 34 percent for commodities. Fewer than 10 percent expect “high quality” government bonds to outperform. Analysts at New York-based Goldman Sachs Group Inc. predict the benchmark Stoxx Europe 600 Index will rally 20 percent this year.
Investors are already beginning to shy away from the debt markets. In the U.S., bond mutual funds had net redemptions of $4.4 billion in the week ended Dec. 21, according to the Investment Company Institute, an industry trade group in Washington. Stock mutual funds attracted a net $3.9 billion in the same period.
‘Double Whammy’
“It could be a double whammy for German bonds,” said Fabrizio Fiorini, head of fixed income in Milan at Aletti Gestielle SGR SpA, who manages about $8 billion. “The recovery next year might not be that strong, but I suspect a double-dip scenario that was much talked about won’t materialize. There will be enough growth to spur demand for riskier assets.”
The German economy will expand at an annual rate of 2.55 percent in 2011, compared with the 3.6 percent projected for last year, according to Bloomberg surveys of analysts.
“Bund yields may continue to fall in an early part of next year,” said Rainer Guntermann, an analyst at Commerzbank AG in Frankfurt. “People are likely to continue to seek safety that German bonds represent as credit deterioration drags on.”
HSBC Analyst
Andre de Silva, the Hong Kong-based head of Asia-Pacific interest-rate research at HSBC Holdings Plc, isn’t so sure. German bonds may lose their status as “the golden benchmark,” he said.
“The more we go the bailout route and the more Germany, as a large contributor, has to stump up, the less German bonds can be claimed as a risk-free asset,” de Silva said. “We are not saying Germany will lose its top credit rating, but the allure of its bonds is tarnished.”
While Germany has one of the lowest deficits in the 17- member euro region, it has earmarked 119.4 billion euros to the European Financial Stability Facility for countries in need of bailouts. The contribution, the biggest by any nation, amounts to 27 percent of the fund.
“It’s a difficult situation for Germany,” said Kind of Frankfurt Trust. “Credit dilution, perceived or real, will push yields higher. It’s no longer the case of the majority bailing out the minority in the euro region, but the other way round.”
Frankfurt Trust is more bullish on prospects for U.S. Treasuries, U.K. gilts and Swedish bonds than for German bunds.
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
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