Mark Dowding, senior bond manager at BlueBay Asset Management in London, said he has been cutting back on Italian and Spanish exposure after a two-year bias towards peripheral debt.
Following a near two-year rally in Spanish and Italian bonds, other segments of the bond market that border on the emerging market sector offer more value, the Citywire AAA-rated manager said.
‘The rally in Spanish and Italian debt has gone along way and it looks like we’ve seen most of the tightening in the periphery spreads that we’re looking for,’ said Dowding, who alongside Raphael Robelin and Russel Matthews is responsible for the €621 million BlueBay Inv Grade Euro Govt Bd fund.
‘Since 2012 we’ve had a long bias towards peripheral debt yet in the course of recent days we have taken our overweight position in Italy, Spain and Ireland down to a neutral position and are starting to look more at central eastern European debt.’
The fund maintains a ‘modestly’ overweight position to Portugal and Slovenia, which means that the fund overall still has an overweight position to peripheral debt. Dowding added that the team were poised to continue to take peripheral exposure down further if relative valuations continued to make them look less attractive.
‘We are starting to see more value in the emerging market versus developed market divide – especially with a country such as Latvia where the debt to GDP is the lowest in the eurozone. ‘
Alongside Latvia which he referred to as being ‘structurally cheap’, Dowding said that he would also consider debt from Romania, Hungary, Iceland, Lithuania, Slovakia and the Czech Republic.
‘This kind of debt still trades on many emerging market desks and yet at current valuations looks structurally cheap,’ he said.
The bond manager also says he expects the yield on German bunds to rise further over the coming months and reach 1.70 percent by the end of the summer on the back of stronger data out of the US and Europe. The fund holds a structural underweight in German bunds but retains positions in futures swaps.
In the last three years to the end of April, the Bluebay Investment Grade Euro Government Bond fund returned 37.58%. Its benchmark, the Barclays Euro Aggregate Treasury TR EUR, rose 23.54% in the same period.