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Friday May 28, 08:14
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Euro zone govt bonds find favour with UK funds
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Prospects of higher interest rates in the United States and weak equity markets prompted British fund managers to add to their holdings of euro zone government bonds in May, a Reuters survey showed on Friday.
The survey of 13 fund managers showed them raising their holdings of debt in the euro zone -- where interest rates are expected to remain steady -- to 42.2 percent of their overall bond holdings from 37.6 percent in April.
Changes in the survey sample probably exaggerated the switch, but fund managers were overweight euro zone government bonds and underweight U.S. Treasury bonds
Overall equity positions remained high, but were trimmed back to 75.3 percent from 81.6 percent and bond stakes rose to 14.9 percent from 11.5 percent as fund managers became more averse to risk and moved to a more neutral stance.
"People are worried about high oil prices, rising inflation and interest rates in the United States," said Alex Lyle, head of managed funds at Threadneedle Investments. "We’ve seen a significant drop in the risk people are prepared to take."
Strategists think inflationary pressures fuelled by high oil prices could prompt the Federal Reserve to raise interest rates in August or possibly even as early as June when the U.S. central bank next meets.
"Earlier in May we saw two big forces come into play," said Katie Pybus, strategy analyst at Henderson Global Investors.
"There was the liquidity withdrawal driven by a fear of higher U.S. interest rates and the other was a slowdown in China...There’s also the fact that the oil price has stayed a lot higher for a lot longer than people expected.
OIL THE KEY
But some who are still overweight equities think that the Fed could keep rates at 46-year lows of one percent for longer if crude prices stay near 21-year highs above $40 a barrel as that could damage growth in the United States, which imports nearly half its daily oil needs.
Oil could also drag down economic growth in the euro zone, which imports most of its needs, and is an argument used by economists who expect the European Central Bank to leave benchmark interest rates at two percent until next year.
"That should support euro zone government bonds...U.S. Treasuries have come off, but people aren’t sure about how high U.S. rates will go," said one fund manager in the survey.
"The market thinks there’s a chance the Fed will hold until after the (U.S. presidential) election in November, but we don’t think that’s likely because oil prices are already feeding through to inflation."
U.S. debt holdings were little changed at around 28.40 percent, but fund managers chose to take money out of Asian and Latin American bonds.
Equity positions in most regions were pared back.
"People will wait to see how the two asset classes respond if and when the Fed raises rates," said John Hatherly, strategist at M&G Asset Management.
(Reuters)
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