Frankfurt-based DWS Investments is waiting for the European Central Bank to stop cutting rates before putting on a curve flattening trade. Johannes Mueller, portfolio manager responsible for a E2 billion European government bond portfolio, says he expects the yield curve to flatten once the ECB stops its rate cuts.
Once the ECB ends its rate cutting, Mueller says the three-month to three-year section of the curve, as well as the two- to 10-year areas of the curve should steepen, leading to an overall curve flattening. However, the two-year section of the curve is still pricing in further ECB cuts, so this curve flattening trade will not be executed for a while yet, he adds.
For the time being, however, he is overweight the long- and short-ends of the curve. Mueller says 30-year European government bonds should be well supported by buying from pension funds and insurance companies.
In addition, Mueller is overweight bunds, because they have cheapened and he believes Germany's bad economic news is already priced into them. He is underweight France, because that country's bad economic news has not been priced into bonds yet. DWS uses the German RAEX index as its benchmark.
