European Manager Wants More Government Paper
Global Asset Management (GAM) plans to add to its holdings of French, German and Italian sovereigns. Ron Tabbouche, London-based portfolio manager, says it will wait for European government bonds to bottom out before making the move. Once the yield on U.S. Treasury five-year paper reaches 5.25% and German five-year paper is at about 5%, the firm will put some of the cash in its $250 million global bond portfolio to work. Last Tuesday, the German five-year note was yielding 4.25% and the U.S. five-year yielded 4.33%. He declined to specify exactly how much would be rotated into the sector. GAM will seek to add longer-dated paper, anywhere from five years and up, because he says short-term interest rates will continue to decline, and that, coupled with inflation, should lead to curve flattening.
In terms of the broader investment landscape, Tabbouche notes that at the end of September, the equity and bond markets completely delinked, with the equity markets indicating a quick, dramatic recovery, while bonds reflected a more pessimistic scenario. Since then, sovereign bonds have rallied, and GAM bought five-, 10- and 30-year European government bonds during the last rally. However, Tabbouche believes the market has gotten a little ahead of itself and there is one last leg to this bear market before it bottoms out. At that point, which Tabbouche believes will come in the first quarter, he will add more German, French and Italian government bonds to its portfolio. GAM manages its fixed-income portfolio on a total return basis and does not use a benchmark index. He declined to give a precise asset allocation, but said the fund invests mainly in sovereigns.