(Bloomberg) -- Pimco, which runs the world’s biggest mutual fund for bonds, said it favors European government securities with long maturities as a scarcity and central-bank buying push low yields even lower.
Among its favorites are Germany’s 20- to 30-year debt, according to Andrew Bosomworth, head of German portfolio management for Pimco in Munich. While raising its forecasts for growth and inflation in the region, Pimco expects long-dated yields -- among the most sensitive to the consumer-price outlook -- to be further cut by the European Central Bank’s bond-buying program. Germany’s 30-year yield already has tumbled to 0.65% from 1.39% on Dec. 31.
“Investors will have to distinguish between fundamental value and technical flows,” Bosomworth said in a phone interview before Pimco published its quarterly outlook on Wednesday. “While I would say a lot is already in the price, I would also say we are in the very early days of the QE program. The ECB purchases will continue to provide support.”
The Frankfurt-based institution and its member central banks have set out to pump 1.1 trillion euros ($1.2 trillion) into the euro-area economy to rekindle growth by acquiring public and private debt through September 2016. They intend to buy 60 billion euros per month of securities due between a minimum of two years and maximum 30 years and 364 days. Challenges include finding enough eligible debt and willing sellers, while not drying up bond-market liquidity.
Pimco now expects the yield spread between short- and longer-maturity bonds in Europe to narrow because of the ECB’s quantitative-easing program. Last year, their call was for spreads to widen.
So many bond yields have shrunk or even dropped below zero that Europe’s long-term investors have to consider entering new classes of assets to cover their liabilities with customers. This may force investment firms, such as pension funds and insurers, to change strategies from tracking benchmark indexes to instead seeking absolute returns, Bosomworth said.
That means they may increasingly shift out of core euro- region securities into U.S. Treasuries, U.K. gilts, and Australian bonds for the safety component of their holdings.
“In the past, a European investor may have turned to German or French bonds for that insurance function of government securities,” Bosomworth said. “Those bonds no longer perform the role to the extent they did in the past. Hence the investors may be looking at these other non-European government bond markets.”
Euro-region government bonds returned 0.8% this month through Tuesday, extending a 17% rally in the past 14 months, fueled by speculation that ECB purchases will help create a scarcity of the fixed-income assets.