Wealth Masters at Danske Turn to U.S. Bonds to Dodge French Risk


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men running the $200 billion wealth management unit of Danske Bank A/S say U.S. Treasuries may well be a safer bet than European bonds this year, even with Donald Trump in the White House.

PoulKobberup, who manages debt assets at Danske’s pension unit, Danica, and now also oversees fixed-income investments at the combined wealth outfit, says “probably, we’ve never had so much political risk in markets as we have right now.”

As Europe girds for a series of elections starting in the Netherlands next month and followed by France in April, the Danske unit has been working on shifting fixed-income exposures away from Europe and into U.S. Treasuries.

Anders Svennesen, who oversees all investment decisions at Danica and has just been named the chief investment officer at Danske’s wealth division, says U.S. bonds could ultimately prove safer, especially given the risks in France should Marine Le Pen win the presidential election there. Her goal is to take the euro zone’s second-biggest economy out of the single currency bloc.

The yield spread on French 10-year government bonds over German debt has widened 13 basis points this year to about 70 basis points. That puts France on a par with Ireland and gives it a spread almost twice as wide as the Netherlands.

Svennesen says that, despite the selloff triggered by Trump’s fiscal braggadocio, U.S. Treasuries are ultimately an insurance contract against global market panic attacks, given their deep liquidity and the dollar’s status as a reserve currency. They proved as much during the global financial crisis of 2008, with investors protecting themselves against the fallout of the U.S. subprime mortgage crisis by stocking up on U.S. government bonds.

And with a lot of euro-zone debt offering historically low yields, thanks in large part to the ECB’s asset purchases, investors may start questioning the relative returns given the risks. Kobberup says asset managers with a lot of French government debt in their portfolios are probably already wondering whether that’s wise.

“I’m guessing most investors are checking just how many French government securities they hold,” he said.

The 10-year benchmark U.S. Treasury yield is currently around 2.4 percent, “which means that even in the case of markets turning into risk-off, flight to quality-mode, we could see really nice returns in Treasury bonds,” Svennesen said.

Kobberup also notes that, despite the prospect of market gyrations following on from political shocks, it’s still very inexpensive to hedge against losses.

“It’s all over the news that prices are running up and down, but at the same time the price to buy insurance is actually historically cheap,” he said. “Our view on Treasuries is to diversify away from Europe though the size of the hedging cost will continue to matter. Lately, it seems the market largely ignored that hedging got a lot cheaper.”

In equities, the only way to stay ahead when markets get volatile is to be at your desk by 4 o’clock in the morning, according to JesperLangmack, who oversees risk assets at Danica and has recently been put in charge of alternative investments at Danske’s wealth unit. He says his portfolios made money after Brexit and the U.S. election by snapping up shares dumped in the initial panic, and by doing it very, very early in the European morning.

Investors can profit from such shocks, as long as they’re willing “to come in at 4 a.m., when the chance is there, instead of coming in at 9 a.m., when everybody has figured out what they should do,” Langmack said. After Brexit and Trump, “there were plenty of opportunities as investors just dumped everything.” It’s an approach he plans to stick with through Europe’s election cycle this year.

“Volatility can be your friend or your enemy,” Svennesen said. “If you get it right it will allow you to make money but if you get it wrong you’ll be worse off and it will be difficult to buy into risk again.”

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