HEAD-TO-HEAD: Bluebay vs Robeco

123456

Unlike the two other large bond markets, the US and Japan, Europe’s government bond market offers a variety of choices and opportunities. From the high-quality, low-yielding German bunds to high-yielding issuance from troubled peripheral countries such as Greece or Iceland.

Many European bonds have been trading at negative yields, which in effect mean that the investor pays for the privilege of lending money to the borrower.

On 2 April, the two-year bonds of Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Portugal, Slovakia, Slovenia, Spain, Sweden and Switzerland were trading at negative yields.

German government two-year bonds have been in negative territory since mid-2014, reaching yields as low as -0.9% in early 2017. On 1 April the yield was -0.59%. Even the country’s ten-year bonds dipped into negative territory in the third quarter of 2016.

Bond fund managers working in such an environment can adopt one of three approaches, Bruno Dhoosche, head of fixed income strategies as Allfunds Bank, told FSA. Some are reluctant to invest in negative-yielding instruments, especially zero-coupon ones that pay no interest, or corporate bonds, for which the investor would effectively pay to assume credit risk in addition to lending money.

Very active bond fund managers see opportunities in a negative-rate environment, as they would in any other. They would buy negative-yield bonds if they expected the yields to drop even further, hoping to cash in on the rising prices of the bonds. Such a trade was viable two years ago, according to Dhoosche, when the European Central Bank (ECB) was expected to cut rates further and expand quantitative easing.

Still others don’t care where the interest rates are and focus only on outperforming their benchmarks, whether they contain negative-yielding instruments or not. For them it’s business as usual, Dhoosche noted.

Even when restricted to the Eurozone, investors in European bonds have a much bigger field to play on than their peers in the US. Decisions of investors in US government bonds boil down to making calls on duration and the yield curve. “Even though there’s a lot of bonds, you don’t have a lot of levers,” Dhoosche said.

The European bond market, by comparison, presents opportunities to play off the countries’ relative value due to a mismatch in economic cycles or differences in duration of their bonds.

An investment universe restricted to the Eurozone “should not be a reason for underperformance”, relative to a broader bond universe, Dhoosche noted.

Investing beyond the Eurozone, into smaller countries of Central Europe or Scandinavia, brings additional opportunities. “You can pick up a nice yield and you have the upside potential from the economic boom that is happening in Europe,” Dhoosche said. “Some of these bonds are denominated in euros, so you don’t even have a currency effect,” he added.

In January 2018, the ECB reduced by half the monthly amount of bonds it buys through the quantitative easing program, to €30bn, extending the purchases until September. Some experts expect the ECB to wind down the program by the end of the year.

With this in mind, FSA compares two funds: the Bluebay Investment Grade Euro Government Bond Fund and the Robeco Euro Government Bonds Fund.

123456