Brandywine Asset Management will rotate $500 million, or 20% of the firm's global sovereign portfolio, out of 10-year European sovereign debt into one- to two-year sovereign bonds, in a strategy designed to shorten duration, says Stephen Smith, portfolio manager. The move, he adds, is likely to take place next month after the European Central Bank cuts interest rates, with Smith anticipating a 50 basis point cut. If his prediction is correct, sovereign bonds in Europe will appreciate, offering a good selling opportunity. Smith has not decided yet which sovereign credits he will purchase, as this choice will depend on currency rates at the time of the rotation.
Smith says he wants to reduce duration from five to four years over the course of this quarter. He says the goal is a continuation of a policy the firm implemented last year, when it reduced, duration from nine to five years. Smith reasons that the global bond market in the industrialized world has been bullish for the past 22 years and that by historical standards, the market is due for a correction. He predicts a surge in interest rates this year, with the 10-year Treasury moving up by 1% from 4% as of last Monday to 5% a year from now.
Smith manages a $2.5 billion global bond fund out of Wilmington, Del. He allocates 36% to sovereign debt of countries using the euro, 15% to Sweden, 14% to U.S. corporates, 12% to Australia, 7% to New Zealand, 7% to U.S. inverse floating rate mortgage-backed securities, 5% to Norway and 4% to Canada. The U.S. allocation, with its corporate and MBS components, is the only non-sovereign part of the portfolio. The firm is short its bogey, the 5.50-year Salomon Smith Barney global government bond index.