LUXEMBOURG (Reuters) - Euro zone government bonds have priced in an overly gloomy economic outlook and waiting with cash or braving higher-yielding corporates are smarter options, Belgian fund manager Petercam's head of bonds believes.
A flight to quality in the face of the credit crisis and market turmoil this week depressed 10-year Bund yields to a mere 3.67 percent, the lowest since late 2006.
Petercam, winner of a European Fund Award for 2007, has drawn down its German Bund holdings in favor of Belgian and Greek bonds and, in its diversified funds, has boosted its share of corporates, including those offering high yields.
"We think it's now time again to be contrarian a bit, not in one day, our style is not to make big moves in one day. We do it gradually," Johnny Debuysscher told Reuters in an interview ahead of the Reuters Funds Summit.
His company was named one of two overall winners for pan-European fund management on Tuesday evening, as well as winning awards for mixed assets and bonds.
"If you want to be contrarian you have to sell your government bond portfolio progressively and go to different kinds of spreads."
Petercam has steadily been doing that from December, bringing its holding of government bonds in diversified funds to some 20 percent from 35 percent late last year.
The Belgian fund manager has also cut its holding of bunds in its government bond funds to 15 percent, while boosting Belgium and Greece to some 10 percent each.
"We are at the maximum for Greece and not too far for Belgium. I prefer the political situation in Greece than Italy at the moment," Debuysscher said, adding there was no certainty of a clear winner in Italy's parliamentary elections in April.
"We can see an extra 10 or 15 basis points... Then Italy will become a candidate again," he said.
In recent weeks, euro zone government bond markets became the latest victim of the liquidity freeze that has blighted many markets since the global credit crisis erupted last August.
Many bond spreads, the premium demanded by investors for holding non-German debt over benchmark Bunds, exploded to levels not seen in the euro's nine-year existence as trading in anything other than the most liquid securities all but dried up.
The spreads of 10-year Greek and Italian bonds, for example, blew out to more than 70 basis points over Bunds.
For Bunds, Debuysscher says a yield of 4-1/4 percent would be a trigger, although such a level may not be seen until the third quarter after a sharp economic downturn in the first and second quarter in the United States.
"It's not impossible that after the summer the U.S. growth can go back to 3 percent because of what the Fed did and because George Bush has tried to give some money to the people... "There is a good probability that things will go better," he said. Continued...
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