November 16, 2016 / 6:31 PM / 3 years ago

Franklin Templeton's Zahn eyes return to euro zone government bonds

LONDON (Reuters) - Euro zone government bonds are starting to look attractive again after a concerted sell-off that has seen the region’s benchmark German bond yield spike 50 basis points over six weeks, Franklin Templeton portfolio manager David Zahn said on Wednesday.

Head of European Fixed Income at Franklin Templeton, David Zahn speaks during the Reuters Global Investment Outlook Summit in London, Britain November 16, 2016. REUTERS/Luke MacGregor

Franklin Templeton Fixed Income Group, which turned underweight euro zone government bonds in September when yields plummeted close to record lows, is reconsidering its position after the sharp correction of recent weeks.

“You’re starting to get to areas where euro zone government bonds look reasonable – not cheap, but reasonable,” said Zahn, who heads European fixed income for Franklin Templeton.

“Because inflation will be slightly above 1 percent next year, and we believe quantitative easing will continue, in that environment bond yields should be quite well anchored in Europe vis a vis their U.S. cousins,” he told the Reuters Global Investment Outlook Summit.

For excerpts of interview, click on [L8N1DH5TO]

Euro zone government bond yields started rising in late September on concerns that the European Central Bank might slow asset purchases.

The trend intensified after Republican Donald Trump won the U.S. presidential election last week, pushing U.S. Treasury yields close to their highest levels this year and increasing inflation expectations globally given talk of $1 trillion in infrastructure investment.

The yield on Germany’s 10-year government bond DE10YT=TWEB, the region’s benchmark, has risen from a Sept. 30 low of minus 0.16 percent to a high of 0.35 percent on Wednesday.

Concern about rising populist and nationalist sentiment across the developed world in the wake of Trump’s triumph has seen selling particularly in the debt of Italy and France, both of which face electoral tests in the near future.

“We have a lot of political uncertainty coming in Europe over the next 12 months, with focus particularly on the Italian referendum and French presidential elections,” Zahn said.

Italy’s referendum on constitutional change is on Dec. 4 while the French vote is scheduled for April-May next year.

However, unlike with Britain’s June vote to exit the European Union and the U.S. election, both of whose outcomes were unexpected, markets are pricing in risks around the Italian and French events, according to Zahn.

Italy’s 10-year spread to German equivalents is close to its highest since October 2014 at 169 basis points, while France’s spread to German Bunds is close to two-year highs at 45 bps.

Opinion polls are making increasingly grim reading for Italian Prime Minister Matteo Renzi, less than three weeks before the referendum on which he has staked his political future.

The risk of a populist departure from moderate, centrist government is spreading across Europe, but the ECB is still driving markets with its 80 billion euro per month asset purchase program, due to end in March 2017.

Slideshow (3 Images)

“They will continue their policies, I think their new inflation forecasts will show that they will be close but not quite at their 2 percent goal in 2019,” said Zahn.

“Our expectation is that they will extend their quantitative easing program beyond March.”

Follow Reuters Summits on Twitter @Reuters_Summits

Editing by Mark Heinrich

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