Pictet & Cie, which manages SF20 billion in fixed-income assets, E3.5 billion of which is devoted to European fixed income, is looking to sell volatility embedded in bonds or in options directly, says Rajeev de Mello, fund manager. "I think some of the volatility in bond markets will calm down. I'm not convinced central banks will cut rates, which will take volatility out of markets. It's an easy trade to make in this environment," he says.
Earlier in the month, the firm reduced duration because yields have fallen too low. Last Tuesday, the benchmark German Bund was yielding 4.65%. The firm was neutral its benchmark, the J.P. Morgan Euro/Government index and is now one year below it. The benchmark's duration is 5.5-years. "The fundamental question remains whether we are going in for a double dip or not," says de Mello. The sluggish growth numbers seen this summer are temporary, he argues, adding that in the event of a stronger recovery story he will increase the underweight duration position.
Towards the end of July, Pictet increased its allocation to triple-B and single-A corporates, buying mainly in the telecom and auto sectors. Pictet bought 10-year benchmark bonds from France Telecom, Deutsche Telekom and British Telecommunications. Pictet added telcos when they were wide last month, because de Mello believes the sector has reached a stage that will be positive for bondholders. The state incumbents will start to revert to more of a utility function and will probably get rid of wireless functions over the next few years, he says. The companies will be more protected by re-regulation and the more aggressive wireless components will be separated from the fixed-line businesses.
Pictet also bought Ford Motor Company's benchmark 6% of '05 and General Motors' 6 1/8% of '07. Earlier in the month Ford's 6% of '06 was trading at 370 basis points over Bunds, but has tightened by100 basis points to 260-280 over. Pictet devotes 10% of its European fixed-income portfolio to corporate bonds.
