The portfolio manager of the Tellus fund at Skagen AS in Norway says he’s holding on to his stash of bonds sold by Europe’s weakest economies on an assumption the European Central Bank will provide more stimulus.
“Since I see that some of the core member states -- France, Germany -- are struggling more than expected, the ECB will be pushed to do more to cut nominal interest rates and to cut spreads in the euro zone,” Torgeir Hoeien, who’s also a former official at Norway’s central bank, said Aug. 27 in an interview in Oslo. “In the end, it’s not enough until the ECB owns all sovereign debt of all the euro-zone members. Logically, that’s what it will take.”
ECB President Mario Draghi used his appearance at this year’s central bank conference in Jackson Hole, Wyoming, to hint that he may resort to quantitative easing to revive growth in the euro area. The comments followed a spate of weak economic reports from the bloc’s biggest economies, with even Germany showing signs of faltering. Gross domestic product in Europe’s biggest economy contracted 0.2 percent last quarter, suggesting the single currency bloc remains far from a recovery.
The lack of growth has driven down consumer prices in a pattern that’s testing the monetary toolbox of central bankers across much of the developed world. Euro-zone inflation was just 0.4 percent in July, less than the 0.5 percent predicted by economists and the lowest reading since 2009.
The Governing Council will use “all the available instruments needed to ensure price stability” and is “ready to adjust the policy stance further,” Draghi said last week. He said that the ECB’s preferred gauge of inflation expectations had fallen below 2 percent.
“I’m fearing more and more that when it comes to inflation, the euro zone is turning into what Japan used to be,” Hoeien said. “Soon you might see an expected deflation in the euro zone.”
Hoeien manages the Skagen Tellus fund, which has returned 8 percent this year and 9 percent over the past 12 months, according to data compiled by Bloomberg. The fund’s largest holdings are U.S. government bonds followed by debt from the European Bank of Reconstruction and Development.
Greek bonds have delivered investors the biggest rewards in euro-area government debt markets this year, returning 32 percent since the end of December, according to data compiled by Bloomberg. Portuguese debt was the second-best performer, returning 19 percent. Italian bonds delivered 12 percent and Irish debt returned 11 percent. German bonds gave investors in the euro area the lowest return, with 8 percent.
“I’m hanging on to my peripheral bonds, so far that has been very good,” Hoeien said. “I’m not fearful of a rise in German yields because even if there is a rise in real yields, inflation expectations are falling so nominal yields will not rise. Soon you might see an expected deflation in the euro zone.”