Hypovereinsbank, which manages approximately E6 billion in government bonds and pfandbriefes, will add new government bonds on the view that increased issuance of two- to five-year bonds will lead to a flattening of the yield curve. Christian Schablitzki, head of HVB's bond trading unit, says governments affected by recent floods will have to raise cash on the debt markets.
Investors who have pulled assets from the equity markets have reinvested capital in the two- to five-year area of the curve, he adds. That inflow of cash, combined with the expected new issuance from governments and quasi-sovereign financing agencies, could lead to curve flattening. In comparison to swaps, this paper may become cheaper. Schablitzki says new issuance will most likely be in the two- to five-year area because many European governments and financing agencies are trying to reduce the duration of their debt. Currently, HVB is underweight government bonds.
For the time being, HVB is overweight jumbo pfandbriefes-- issues of at least E500 million--because they are cheap versus six-month EURIBOR, the swap spread being up to 35 basis points on the ten-years. Schablitzki sees room on the upside for jumbo pfandbriefe, because some mortgage banks have been having been experiencing credit rating downgrades, which have pushed out pfandbriefe spreads. Considering the strength of the banks' mortgage portfolios, Schablitzki reckons there is arbitrage between the banks' ratings and the pfandbriefe they have issued. "It's not right for pfandbriefe to have been widening out so much," he says. HVB does not use a benchmark index.
