Pioneer Investments, which manages EUR9 billion in European credit and government bonds, will add France Telecom and Deutsche Telekom step-up coupon bonds when the recent volatility in these securities decreases. On the back of recent uncertainty over potential downgrades, asset disposal programs and debt refinancing, these companies' bonds have widened 10-30 basis points, depending on name and maturity, says Raffaele Bertoni, portfolio manager. "It's difficult to predict the limit of the widening; it depends on the further news on asset disposals--for example, how France Telecom will finance Mobilcom debt," he adds. Once a clearer picture emerges, the firm will pick up shorter-dated step-up coupon bonds, he says. FT's 6.75% step-up of '08 was trading 155 basis points over swaps last Tuesday, while DT's 5.75% step-up of '06 was trading at about 115 over.
The firm is also overweight financials, especially junior debt from lower-rated tier two banks, such as Portugal's Banco Espirito Santo's 61/4% of '11 and Banco Comercial Portugues' 61/4% '11. These bonds are trading at a particularly wide level compared to senior bank debt, providing 30-40 basis points of incremental spread, says Bertoni, adding that the bonds should tighten by another 10 basis points this year. Pioneer benchmarks the corporate portion of the portfolio against the Merrill Lynch Broad European Corporate index.
Currently, the government portion of the portfolio has a duration of 6.7 years. This is long its benchmark, the J.P. Morgan European Monetary Union index, by about 20%, which is 5.6 years. Cataldo says he would move into the medium part of the curve if the long-end flattens, because "if we are right, the curve could be steep there, if there are signs of business recovery, and the short-end will offer no value."
