Posted inSOUTHERN EUROPEFixed Income

Catalan investors brace for inflation spike

Another quarter of Barcelona’s fund investors think inflation will reach the ECB’s target by 2019. This contrasts with only one fund buyer in the room expecting inflation to stay below 2% forever.

If the Catalans’ predictions materialise, European government bond markets would no doubt be in for a pounding. Investors from Barcelona and the rest of Spain have already been anticipating the eventuality of rising yields: in 2016, they invested a net €2.1bn in short-duration fixed income and sold off long-duration bonds.

Julia Peukert, a member of Franklin Templeton’s investment team who presented at the forum, took an opposing view, claiming the bond bull market in Europe is not yet over. “Last summer yields were at record lows and we reduced our exposure, but now we think the lower-for-longer environment will last a bit longer. Most of the bonds we own have an exposure between 7 and 10 years,” she said.

ECB remains key

Franklin Templeton has this view because it expects the ECB’s continued easing to keep a lid on bond yields. “The ECB will probably gradually decrease their stimulus, but [ECB president Mario] Draghi has made it clear he could increase asset purchases again if necessary, while he has also said he doesn’t see inflation where he wants to have it. I don’t foresee any rate hikes over the next three years either,” said Peukert (pictured right).

But what if Barcelona’s inflation bulls are right? “We are ready to change duration quickly by shortening bond futures,” said Peukert.

Whether this reassurance will convince Barcelona’s fund selectors to outsource the duration management of their government bond portfolios to Franklin Templeton is of course another matter. Portfolio managers would probably be most inclined to do that if they agree with the current point of view of the fund manager in question. 

Here you can see a full overview of delegate voting results from Expert Investor Barcelona.  

And here is a slideshow of photos taken at the event.

 

Part of the Bonhill Group.