Edinburgh, Scotland-based Aegon Asset Management will extend duration in the European portion of its £500 million global bond portfolio, roughly £150 million, once 10-year bunds reach 51/4%. Roberto Carulli, fund manager, says he is betting on a yield flattening on the zero- to three-year portion of the curve and is underweight there in favor of the three- to five-year portion. He believes the European Central Bank will raise rates by 40-50 basis points by year-end, as the economy begins to recover. If yields on 10-year benchmark bunds reach 4.80%, Carulli says he may put on some opportunistic short trades. Alternatively, if bunds drop to 4.50%, he will take that opportunity to go shorter. Last Wednesday, 10-year bunds were yielding 4.94%. For the European portion of the fund, Aegon uses the Salomon Brothers European government bond index.
Recently, Carulli has moved assets out of Europe's core markets and into the so-called peripheral markets of Italy and Portugal to gain extra yield. Earlier in the month, the firm sold its positions in France's 5% of '16 and bought the Italy 5 1/4% of '17, garnering 23 basis points in yield. The firm also sold Germany's 6 3/4% of '02 in favor of Portugal's 8 7/8% of '04, which gave him another 23 basis point pick up. And lastly, Aegon dropped France's 6% of '04 and picked up Italy's 4 1/2% of '04, gaining 17 basis points in yield.
