ABN AMRO Asset Management in London might sell European government bonds in the middle of the yield curve and bulk up on short- and long-dated maturities. The barbell approach will be adopted if there is a further flattening of the yield curve, which is more likely than not in the next six months, said Christian Eckert, head of European fixed income with oversight of the interest rate, credit and currency strategies implemented in ABN's €35 billion portfolio.
"The market isn't offering much of a risk premium for inflation and we expect the economic environment in Europe to weaken," said Eckert, explaining why the firm is increasing sensitivity to interest rate changes now.
On the duration front, ABN is neutral its benchmarks at about five years. The investment manager noted a change to the portfolio's duration in the order of six months to one year is imminent, but said there is no telling yet which way it will go. "It's very unclear whether we're going to see an economic slowdown or reacceleration in the U.S. and Asia, but we're tracking a wide range of indicators closely and are ready to react quickly with an increase or reduction in duration," said Eckert.
Eckert argued the firm's interest-rate strategy makes the biggest difference to performance in the current environment. That said, he does not intend to add to the government bond allocation, because the environment for credit is positive and he wants to maintain the diversification of the overall portfolio. He also noted, "it is very expensive to trade credit, since volatility is so low and spreads are so tight," observing that turnover in credit portfolios in Europe declined dramatically towards the end of 2004 and hasn't picked up again. "We'd need to see an increase of 20% to 30% in the VIX (Chicago Board Options Exchange Volatility Index) before we'd consider trading credit more actively."
Within credit, Eckert believes valuations of both asset-backeds and high-yield bonds are more stretched than investment-grade corporates, and if there is any change to the current positive environment for credit, these sectors are likely to suffer greater losses.
