Jupiter favours European government bonds as ECB hike pricing 'overdone'

By Alun John

LONDON, May 13 (Reuters) - Asset manager Jupiter has been buying European government bonds, particularly shorter-dated German debt, and reducing exposure to U.S. Treasuries, because it thinks the market is pricing in too many rate hikes from the European Central Bank and the Bank of England.

"As many as three (ECB) rate hikes are now priced in, this feels overdone," said Ariel Bezalel, investment manager at Jupiter, which manages some 47 billion pounds ($63.5 billion). He pointed to signs of slowing European economic growth, such as Tuesday's French unemployment data.

That has led to him shifting into European debt, especially German short-dated debt.

In contrast, he said, "we are worried about America overheating".

This view has been growing among investors. European government bonds have seen some of the largest investor inflows in the second quarter, according to Lipper data.

The data shows a net $3.05 billion has flowed into euro zone government bond funds, with the majority going into medium-term instruments, compared with a net inflow of $1.69 billion into U.S. Treasury funds.

This marks a switch from the first quarter of the year, when some $4.392 billion flowed into Treasuries, while just $829 million went into euro zone sovereign bonds, according to the data.

Money markets show traders see no chance of any move from the U.S. Federal Reserve for at least another year.

Bezalel said he also thought markets were pricing too many rate hikes from the BoE - at least two are priced in this year - but he had not added to his position in British government bonds because of the elevated political risk premium and he already had sufficient exposure.

UK gilts have been by far the weakest-performing developed-market government bonds since the U.S. and Israel launched attacks on Iran in late February. At 4.51%, two-year gilt yields are a full percentage point above where they were in late February GB2YT=RR, compared with 3.98% for U.S. two-year yields, which have risen 60 basis points in that time US2YT-=RR.

However, he said he thought developments in 2022, when gilt markets sold off due to then Prime Minister Liz Truss' "mini-budget", would mean potential alternative British prime ministers would be wary about changing policy in a way that would cause a long-lasting selloff in gilts.

($1 = 0.7404 pounds)