Edinburgh, Scotland-based Aegon Asset Management, which manages roughly £150 million in European bonds, is considering buying inflation-linked bonds for the first time, says Roberto Carulli, fund manager. In this low-yield environment for government bonds, Carulli is putting together a safe, defensive portfolio and believes that if inflation expectations rise 20 basis points above the current 1.5% predicted by the European Central Bank, inflation linked bonds stand to outperform nominal bonds. Buying linkers then would be a way to pick up some yield in the portfolio, he says.
Carulli says the longer oil prices stay high, the greater the chance inflation will rise. And while some believe oil prices will drop to $25 per barrel, Carulli says there is a possibility they will stay high because reserves have been depleted on the back of problems in Venezuela and an extremely cold winter. In the meantime, Carulli will be keeping an eye on the ECB's inflation reports.
In addition, if the 10-year bund's yield drops sharply to 3.75%, Carulli will look at putting on a short position versus his benchmark, the Salmon Smith Barney European government bond index. The lower yields go, the larger the short position will be. Carulli says when bunds reach 3.5% he will go a year short the index. The maximum short permitted by the fund's guidelines is minus three years. However, if yields meander down gently, Carulli might reconsider the short position.
Recently, Carulli has put on an off-index bet looking for yield by buying triple-A rated Spanish mortgage bonds called cedulas. Most recently, Carulli bought AyT4--a securitization of cedulas from a number of issuers. That bond matures in '13 and has a 4% coupon. He also bought Caixa de Barcelona's 3.5% cedulas of '10.
