BNP Paribas Asset Management, which manages roughly E46 billion in fixed-income assets from its Paris office, plans to sell five-year government bonds across the board and buy only French government bonds in expectation of an imminent rate cut from the European Central Bank. Claude Guerin, portfolio manager, anticipates a 50 basis points cut from the ECB, which he says will cause the five-year portion of the yield curve to steepen and for the curve to flatten between the five- to 10-year area, because inflation will drop.
Guerin will focus purchases on TECs, which are floaters linked to long constant maturities. Guerin says he uses TECs specifically as a play on the steepening yield curve. He says he will also maintain his position in two-year government paper.
Guerin says he has been selling his positions in the so-called peripheral European markets--Italy and Spain--and is reinvesting in 10-year bonds from Germany, France and the Netherlands. Recently, Italian and Spanish debt has become too expensive, says Guerin following investors' concerns about the so-called core European economies. Guerin will take profits in the peripheral markets and buy the core ones, which have widened out over the past months. "The benchmark bund has lost its premium over [peripheral bonds] but will regain that premium in the coming months," predicts Guerin.
Paribas allocates about 30% of its portfolio to corporate credits and plans to remain underweight, because the firm is risk averse and believe the corporate credit crisis is not over. The firm uses a variety of benchmark indices.