MARKET VIEW EdMOnd dE ROTHsCHILd INVestMeNt MaNagers 3 However it is noticeable that some countries are faring better than others, and Germany in particular. Unemployment in Germany is on a steep downward trend, and under 7%, while Italy and spain have already entered into recession. France, on the other hand, is still facing the possible loss of its AAA rating. This prospect raises the following question: how can a country reduce public debt, avoid aggravating the recession and hang on to its rating? There seems to be no obvious answer, and one of those targets may have to be sacrificed. 2012: a tactical year ? In this troubled context, we believe a tactical approach to portfolio management is more suited than a mid/long term strategic position. It will be possible to generate returns, particularly using arbitrage and hedging strategies. Options can be used to play a rise or a fall in fixed income volatility. We also rely on other derivative instruments to capture the yield paid by bonds, such as interest rate swaps. swap strategies create synthetic exposure to the fixed income market while removing sovereign default risk. Investing through derivatives is fast and increases overall portfolio liquidity. These highly liquid instruments also have the advantage of covering a wide spectrum of strategies. We can use forwards to implement strategies on interest rates over different time horizons. The flexibility and reaction time that characterise these instruments are key factors in such a volatile 600 500 Sovereign bond issues (PIIGS) scheduled for the following years (in billion €) Portugal 400 300 200 100 0 Irlande Greece Spain Italy 1 year 2 years 3 years 4 years 5 years 6 years Source : Bloomberg
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