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DeAm: Wider Swaps Will Prompt Covered Bonds Play

Deutsche Asset Management, which manages E16 billion in fixed-income assets from its Zurich office, is biding its time until swap spreads on government bonds and pfandbriefe widen before adding to its covered bond positions. Sven Rump, portfolio manager, says swap spreads are tight because of supply and demand, making government bonds relatively cheap versus covered bonds. Governments will be issuing more bonds in the coming months, and for the time being there is no premium to be paid on government bonds. Once spreads widen, he plans to move between 10-15% of the portfolio, or at least E1.6 billion, into covered bonds. Currently, the spread between 10-year government paper and pfandbriefe is 26 basis points. Rump says he will buy when spreads are 50 basis points.

Rump plans to buy German (pfandbriefe), French (obligation fonciere) and perhaps some Spanish (cedulas) covered bonds once spreads widen. He says he will buy paper in the 10-year portion of the curve because it is liquid and less risky. Covered bonds are issued by certain mortgage banks in select European countries to fund their mortgage lending activity.

At the moment, DeAm is overweight government bonds. Rump has bought bunds and French govvies on the 30-year end of the curve, as a slightly defensive position. Overall, the portfolio is slightly short its benchmark, because Rump expects interest rate hike in six months time. The firm uses the J.P. Morgan government bond index, which has a 5.6-year duration. The duration of the portfolio is at roughly 5.1-years.

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