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Lombard Looks To Reduce Gilts

12 Jan 2003

Lombard Odier, which has $9 billion in fixed-income assets under management, is looking to go underweight gilts and reinvest in European government bonds, but is waiting for gilts to outperform European government bonds by 20 basis points before selling them. Jonathan Cunlisse, a government bond portfolio manager in London, says he will make the move because he sees some further convergence between long-term gilt yields and long-term European government bond yields and a heavy supply of gilts could weigh on the market. As of last Tuesday, benchmark bunds were yielding 4.89% and benchmark gilts 4.56%.

In addition, Cunlisse is positive on European governments bonds versus U.S. Treasuries. He says weaker European economic growth, more of an activist stance from the European Central Bank, and a positive inflation outlook, all bode well for European government bonds. Furthermore, he posits that the U.S. market will be range bound for some time and that it does not adequately discount re-flationary pressures.

The firm is also maintaining an underweight in Japan, where the market is pricing in very little progress in terms of policy response to the country's financial woes. Cunlisse anticipates some modest back up in intermediate- and long-dated bond yields. Finally, the appointment of a new governor at the Bank of Japan in March could have negative repercussions in the bond market. The new governor will be announced in March and Cunlisse suspects there will be some determination to have more inflation targeting, which could be a problem.

12 Jan 2003