J.P. Morgan Fleming Asset Management has lengthened the duration of its E1.1 billion euro bond fund. "We've positioned our portfolios long for a modest re-steepening of the yield curve in Europe," says David Gibbon, global fixed-income strategist in London. Gibbon says the move is a summer-time trade, which he will likely re-think in the fall.
Gibbon says the asset manager has been buying mostly 10-year government bonds from Germany and France. The fund is now carrying duration about a half year longer than its benchmark the J.P. Morgan EMU government bond index, which has a duration of about 5.5 years.
By the time the next round of economic data is released, it should be apparent whether gains seen in the most recent batch of economic indicators are sustainable, says Gibbon. If he begins to see a retracement in yields, Gibbon says he will cut the long position.
The markets have been U.S.-driven, and Gibbon believes a back up in global rates is premature. "It's fair to say the back up in rates is partially justified by the recent round of economic data. But the EURIBOR futures are pricing in no chance of interest rate easing in last half this year and possible hike in the next year, which seems premature to us," says Gibbon of his decision to lengthen duration.
J.P. Morgan Fleming also has an overweight in Swedish government bonds versus its core Continental European bond holdings, because Gibbon expects the economic upturn in Sweden will be slower than in Europe. He also expects the Riksbank to ease rates further.
