Long-dated bonds might be attracting attention from institutional investors, but active managers also are taking advantage of the extra yield available.
“Our sense is that the bulk of the demand (for long-dated bonds) has been real money-type investors, including active funds, who in many cases don't need the duration but are just looking for the yield,” said Hemal Popat, principal in London at Mercer Investments. “If you already hold a 30-year Spanish bond, switching into the 2066 (50-year bond) on a risk-neutral basis could make sense.”
He said that applies to both traditional fixed-income managers and to absolute-return bond managers.
The potential for the European Central Bank to extend its asset purchase program beyond 30-year bonds and into the 50-year maturities also is an attraction, said Mike Riddell, London-based fixed-income portfolio manager at Allianz Global Investors. He said that, in that case, the capital gains on those bonds will be 5% to 10%.
Franklin Templeton Investments' David Zahn, head of European fixed income in London, declined to comment on recent issues of long-dated eurozone bonds, but said the money manager's European strategies own Irish 30-year bonds.
“We do think there is value out there in some of the names because they give you a bit more yield. The curve is relatively steep out to (that duration,) and you can pick up that extra alpha for your clients.”
Mark Dowding, London-based partner and co-head of investment-grade debt at BlueBay Asset Management LLP, said the manager has been buying longer-dated securities, but declined to comment on individual transactions.
“We have a view which is generally constructive on the market at the moment. We think the European fixed-income curves can continue to flatten, and consequently some of these deals have been attractively priced and we have been happy to participate,” he said.
Pioneer Investments does not buy these assets to hold to maturity, but takes a more tactical approach.
“We get involved if we feel the spread is attractive and can create short-term opportunities,” said Cosimo Marasciulo, head of government bonds at Pioneer Investments in Dublin. “We have been involved in a couple (of these issuances) in the past, and continue to monitor the market on that part of the curve.”
Mr. Riddell said he held longer-dated France positions “a couple of months ago, and then a bit of the France and Belgium government bonds.”
He would have bought more eurozone bonds, were it not for the risk of a U.K. exit from the European Union that is hanging over the region.
“I decided not to buy Spain because I'm concerned that, if Brexit happens — and the odds seem to be getting slimmer — one of the most likely reactions in financial markets will be for the periphery to sell off. If the second-largest economy in the EU votes to leave the EU, that could call into question the political will behind "project euro.'”
If the markets start questioning whether political will remains behind the project, “it is natural to expect the periphery to sell off. So I am sticking with semi-core, avoiding the periphery —even though the Spanish curve looks pretty good,” Mr. Riddell said.
