Credit Suisse Asset Management, which manages €7.5 billion in European fixed-income assets from its London office, has taken profits on telco, auto and cyclical paper to make room for new issuance.John de Garis, head of CSAM's European fixed-income team in London, declined to detail the credits he sold.
CSAM is taking a cautious approach to the European credit market because bond levels are pricing in an over-aggressive scenario for this year's economic growth. Spreads were expected to tighten gradually over the year, de Garis says. "That's already happened in January," he continues. The fund manager does not intend to reduce the firm's credit allocation, but will continue to take profits.
In the short-term, de Garis thinks there could be a reversal of the tightening trend, because the market is pricing in European Central Bank rate hikes, instead of the cuts de Garis anticipates. He is selling credits now in order to be well positioned to bargain hunt once spreads widen out again. CSAM's allocation to corporate credits is roughly 30% with the rest in government bonds.
From a top down perspective, CSAM has been adding to its credit allocation over the last year. At first, the firm added triple- and double-A credits and has since rotated into single-As and triple-B rated bonds to pick up additional yield after higher quality names tightened.
"People are now focusing on cyclical trades in anticipation of a robust economic recovery. I'm not convinced by that kind of trade," says de Garis. Instead, he has bought into subordinated banking names, which he says provide single-A spread.
In terms of the government bond market, de Garis thinks it's a bit too early for a curve flattening trade because he foresees some further interest-rate cuts from the ECB over the next few months, which will benefit the short-end. CSAM uses the Lehman Brothers euro aggregate and euro corporate indices as its benchmarks.
