Bond Manager With $14 Billion Loads Up to Guard Against Frexit

(Bloomberg) -- Political risk is holding down European interest rates right now.

That's the view of Svenska Handelsbanken AB's asset management unit, which is keeping it's bond funds slightly geared toward lower rates.

“The political worry is like a wet blanket over the market,” said Lena Fahlen, head of fixed income at the unit, said in a phone interview on Monday. “We look for opportunities going short but we think we must get the French election over. We're positive to the economic development, but the political storm clouds will weigh on the market.”

Factoring in political risk has emerged as one of the main preoccupations of the markets after investors last year were surprised by U.K. voters deciding to leave the European Union and the election of Donald Trump in the U.S. Now, the National Front candidate Marine Le Pen has emerged as a contender in France amid pledges to take the second-largest euro member out of the single currency bloc, or a so-called Frexit.

Bond investors are trying to hide in Europe, with the spread between the French and the German 10-year benchmark bonds widening about 20 basis points so far this year.

Still, Fahlen, who oversees 130 billion kroner ($14 billion), has bought French bonds in the Handelsbanken Euro Obligation fund since her main scenario is that Le Pen won't win the French election.

“Normally without this much political uncertainty in the system, these rates trade similarly,” she said. “Now there are big differences within the European fixed income market -- it's very much driven by politics.”

The Euro Obligation fund has returned 1.3 percent this year, after delivering returns of 2.7 in 2016.

Fahlen's unit has been positioned for a recoil in the bond markets in the past weeks. Interest rates have increased “too fast” after the U.S. election due to a “strong consensus view,” she said.

“I see a risk for a correction for both rates and stocks,” she said. “The market has run before.”

The fund manager has shifted to higher-rated companies and a bit shorter duration in the past six months on the longer-term view that rates will rise and the European Central Bank will start tapering, Fahlen said.

“There could possibly be a signal of smaller purchases after the summer or something like that,” she said. “Then we see some worries that the credit market could be a bit messy.”

To contact the reporter on this story: Jonas Cho Walsgard in Oslo at jchowalsgard@bloomberg.net.

To contact the editors responsible for this story: Veronica Ek at vek@bloomberg.net, Jonas Bergman at jbergman@bloomberg.net, Stephen Treloar