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Burnt by bad bonds, funds give Europe another shot

(China Daily/Agencies)
Updated: 2008-08-19 15:05

A sculpture of the euro sign stands outside the European Central Bank in Frankfurt, Germany. [Agencies]

OppenheimerFunds Inc's Robert Robis bought European bonds last quarter figuring they would rally as concern about slower growth trumped inflation. He was wrong.

Now, he's about to try again. Only this time, he's joined by a growing number of international investors shifting money out of Treasuries and into Europe. They are betting that the region's crumbling economy will finally temper gains in consumer prices and allow the European Central Bank to lower interest rates for the first time since 2003.

A weekly survey by research firm Ried, Thunberg & Co shows traders are the most bullish on German bunds since October 2001.

"We're better positioned to have a period of European outperformance," said Robis, who manages $10 billion of fixed-income assets at Oppenheimer in New York and bought bunds in January only to sell them in June as the debt depreciated when the ECB said it may have to raise rates.

"Growth numbers are so poor in Europe right now that they'll probably have to consider an easing at some point once inflation peaks."

Jersey City, New Jersey-based Ried Thunberg's index measuring the sentiment of money managers overseeing $1.41 trillion toward German bunds rose to 60 on August 8, from 52 the week before.

A reading above 50 indicates investors expect bonds to rise by October. The Treasury index stood at 49.

Evergreen's 'conviction'

While Robis considers getting back in, managers at Pictet & Cie of Geneva, Philadelphia-based Brandywine Global Investment Management and Evergreen International Advisers in London said they are putting on trades that would profit from European debt returns exceeding Treasuries.

"One of my few conviction beliefs at the moment is that US Treasuries are overvalued compared to European sovereign bonds," said Tony Norris, who oversees $10 billion in international strategies as chief investment officer and senior portfolio manager with Evergreen.

The benchmark 4.25 percent bund due in July 2018 closed last week at 100.65 to yield 4.16 percent. The benchmark 4 percent Treasury maturing in August 2018 finished at 101 10/32 to yield 3.84 percent.

After lagging behind in the first half of the year, European bonds are starting to rally, with bunds returning 3.18 percent since June, versus 1.29 percent for US debt, Merrill Lynch & Co index data show. In the UK, which isn't part of the European Union, bonds have returned 4.07 percent; in France, 3.43 percent; and Italy, 3.57 percent.

German bunds haven't outperformed their US counterparts on an annual basis since 2005, a year when the Federal Reserve raised its benchmark interest rate at every one of its eight policy meetings and the ECB increased its key rate once.