Amsterdam-based Delta Lloyd plans to purchase core European government bonds and high-grade corporate debt such as Freddie Mac, KfW, Germany's Landesbanks and France's Cades. The firm will make the purchases with proceeds from the sale of Italian, Spanish and Portuguese government debt and sub-triple-A credits. Jop Bresser, director of fixed-income management, said the flight to quality in the firm's E1.2 billion Renta fund, was fueled by the belief that many more double-A rated corporates will be downgraded in the coming months.
The firm had positions in the eight- to 11-year area of the curve in Spanish and Portugese paper, and Italian paper in the six- to seven-year area, all of which it sold. Bresser said he bought Dutch, German and French paper at the long end of the curve, because he believes European inflation will come down and real interest rates are too high at the moment and should drop as well. France has already announced its plans to buy back debt, and there are noises Holland and Germany will follow suit, which Bresser says will be good news for longer-dated paper, especially '28s and '33s.
The firm uses the Salomon Smith Barney Euro big index as its benchmark for the Renta fund. The fund is long its bogey's duration by about 15%, said Bresser. The index's duration is 5.01 years.