ABN AMRO raises its position in European covered bonds

Press release -

ABN AMRO has raised its holding of European bonds that offer collateral (covered bonds) while at the same time reducing its position in American mortgage-backed securities (MBS).

Richard de Groot, ABN AMRO Private Banking's Global Head of Investment Centre, said: "We have upped our stake in covered European bonds. At spreads of around 60 basis points, covered bonds are an attractive alternative to the negative yields generated by government bonds, serving as a buffer for the overall bond portfolio. Covered bonds are less cyclically sensitive than MBS, our stake in which we have halved. Over the past few months, we’ve seen economic conditions deteriorate for MBS, while we also expect demand to tail off, as many professional investors already have sizeable positions in this particular segment."

Neutral on equities

Despite slowing economic growth and corporate earnings downgrades, sentiment in the equity markets remains upbeat. Investors are taking heart from indications by central banks – including the US Federal Reserve (Fed) and the European Central Bank (ECB) – that there are unlikely to be any further interest rate hikes this year. With central banks increasingly shifting towards a more accommodating stance, investors have grown less concerned that economies will slide into recession later in the year. That said, just in this last week the US yield curve has inverted – i.e. short yields are now higher than those on long-dated paper – and this typically signals the possibility of an imminent recession. However, ABN AMRO believes a recession will be sidestepped for now, while the political risks do not seem to have much impact on investor sentiment. All of which adds up to a neutral view on equities.

Not keen on bonds

As a category, bonds do not currently appeal to ABN AMRO. Within this asset class, it remains sanguine about debt instruments issued by emerging markets, both government and corporate bonds denominated in hard currencies and paper in domestic currencies. In terms of alternatives, ABN AMRO still prefers commodities. It has taken a position in gold in light of the expected favourable trend in gold prices in 2019, on the back of an expected uptick in the Chinese currency. A stronger yuan reflects greater confidence in the Chinese economy and China is a key buyer of gold. In addition, ABN AMRO expects the US dollar to weaken, which usually means that gold prices will go up.

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