SEB Investment Funds is looking to reverse its barbell strategy in its E3.75 billion fund managed out of Frankfurt. Once 10-year Treasuries yield 4.5% and 10-year European government bonds yield 4.75%, the firm will return to a neutral duration position, by buying back into the 10-year portion of the yield curve, says Martin Hochstein, head of fixed income. The move could happen by year-end, he says.
"We are thinking there could be a yield spike, by year-end. When the market becomes more illiquid by year-end, we will see more volatility. Also the war premium will diminish a little more and economic figures are stabilizing, but the market is expecting the worst. It's good to play the other side, we're a little more optimistic," says Hochstein. The firm will go to a neutral duration because there is more potential for the curve to flatten if it reaches yield targets Hochstein expects.
For the time being, the firm is running a small duration underweight position, because Hochstein believes the market has seen the lowest yields. He also says there will be no further cuts from the Federal Reserve, but an additional 50 basis points of cuts from the European Central Bank, though this is already priced into the market. SEB is 10% underweight its U.S. benchmark index, the Salomon Smith Barney Government Bond, which has a duration of 5.8 years. The firm is 10-12% underweight its European benchmark index, the J.P. Morgan EMU Government Bond, which has a 5.6-year duration. The firm invests between 5-10% in corporate credit and the balance in government bonds and swap-related products, like agencies.
