16 September 2002, 09:49  European Bond Investors See ECB Cutting Rates, Boosting Debt

/www.bloomberg.com/ London, Sept. 15 (Bloomberg) -- Miguel Sousa, who helps oversee 1 billion euros ($983 million) in bonds at Barclays Plc in Lisbon, is positive on debt since he sees the economy slowing, prompting the European Central Bank to cut interest rates soon.
``We bought two-year bonds three or four months ago -- we're sitting back and enjoying the ride,'' said Sousa, who currently holds more bonds with the shortest maturities than is recommended by his benchmark. ``I won't be surprised if we see a further rally in bonds.''
The German 4 percent note due in June 2004 fell 0.10, or 1 euro per 1,000-euro ($972) face amount, in the week, to 101.26. On Thursday yields had their biggest one-day drop, 10 basis points, since August 2. The yield rounded out the week at 3.25 percent, 5 basis points higher from the week before. A basis point is 0.01 percentage point.
The ECB on Thursday left interest rates at 3.25 percent. Still, interest-rate futures indicate traders are paring bets the bank will leave them unchanged by year end. The December contract dropped 9 basis points on Thursday and Friday to 3.14 percent. That's 17 basis points below the three-month lending rate.
``The economy is not healthy and interest rates are going down,'' said Sousa, who also holds 10-year bunds, as well as French and Italian government debt.
The yield on the German benchmark 5 percent bund due in July 2012 was little changed in the week at 4.41 percent, 1 basis point from the lowest level since Nov. 13.
Signs of a faltering economy have helped push equities down, highlighting the appeal of debt's fixed payments, analysts said.
Sousa agrees. ``I don't expect to see a bull market on equities in the next six months,'' and that's going to be good for bonds, he said.
Economy Worries
The Dow Jones Stoxx 50 has shed 31 percent this year, while German industrial production, factory orders and retail sales fell in July, and unemployment in Europe's biggest economy is at a three-year high.
Growth in the 12 countries using the euro is likely to slip below 1 percent this year, the weakest pace since the 1993 recession, the European Commission said.
Stephan Gamper, who manages $25 billion at Baloise Asset Management in Basel, Switzerland, is increasing the amount of bonds in his portfolio on concern about the economy.
``We have to face the facts that we are probably in a recession,'' he said. In recent weeks Baloise increased the bond portion of their investments to 90 percent from 80 percent, switching from equities, he said.
Germany's benchmark DAX Index dropped 1.8 percent on Friday, extending this year's decline to 35 percent. France's CAC Index has shed 32 percent in 2002. Equities have plunged in the U.S. in 2002, with the Standard & Poor's 500 Index down 22.5 percent.
`Same Old Story'
Gamper remains positive about debt, even though he considers them expensive, he said. He has bought Swiss franc bonds and ``a lot of German paper,'' buying debt with maturities over 10 years.
For Martin Figge, who helps manage 4 billion euros at SEB Invest in Frankfurt: ``It's the same old story -- equities are driving the market.'' In the second quarter he held fewer bonds than recommended by his benchmark, ``which proved to be a little bit wrong,'' he said.
German 10-year benchmark bunds have returned investors 4.5 percent in the past two months, including reinvested interest. That's compared with 2.8 percent in the same period a year ago. He's since added to his portfolios and now holds bonds in line with his benchmark.
Even so, Figge said an economic recovery is ``slowly on track'' and that his ideal position at the beginning of the fourth quarter would be to hold fewer bonds than recommended by his benchmark as yields will be ``slightly higher'' by year end.
However, ``it's a bit too early'' to buy corporate debt, Figge said. The attraction of credit ``has a lot to do with equities. If there's not a clear trend there,'' investors should stay away from credit for the time being, he said.
Frank Jansen, who helps oversee 1 billion euros at KBC Conseil Service in Luxembourg, agrees that yields will ``slowly increase'' this year. He holds fewer bonds than what's recommended by his benchmark because ``yields are at recession levels and we're not in a recession.''
Yields on the benchmark bund have shed as much as 45 basis points so far this year. On the German two-year note, yields have plunged as much as 114 basis points, reaching a 10-month low on Sept. 6. Last week yields had their biggest weekly decline since the Sept. 11 terrorist attacks.

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