Murray Johnstone International is adding Japanese and euro-denominated government bonds on the view that the economic slowdown in the U.S. has not been fully discounted, and that these bond yields will reach their 1998 lows. "There is still a strong correlation between global bond markets, so as the U.S. yields drop it will take the other country's yields lower as well," says Rod Davidson, who manages $750 million in taxable fixed income. Davidson will bring his Japanese government bonds to neutral from 4% underweight, and will add 8% to his European government paper by selling his sterling-denominated long bonds because he considers them too rich, with the U.K. currency overvalued versus the euro. On the view that yields will be dropping all along the curve, he has been adding duration, recently purchasing the German 6.5% of '27 Bunds.
Although there will be some steepening in the front of the yield curve, Davidson predicts the long end will flatten as inflation in Europe drops to 1.5-2%. Steady growth in Europe, with an average gross domestic product of 2.5% this year, will also help bring the yields down, says Davidson. The international bond fund is divided between Europe, Japan and ex-European countries such as the U.K., Denmark, Norway and Finland, as well as Australia. Benchmarked against the Salomon Smith Barney Global ex-U.S. index, the firm is marginally long its duration at 5.6 years.
