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Andromeda bets on market overestimating future ECB rate cuts

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Alberto Gallo, CIO of $200m hedge fund Andromeda Capital Management, is betting that the ECB will cut interest rates just once or twice this year by selling European government bonds, according to a report by Bloomberg.

Gallo, who previously made correct calls on inflation and the Federal Reserve’s rate hikes, believes that the market has overestimated the number of interest rate cuts the ECB will make, and says that Europe is unlikely to enter a recession when governments in the region are spending more, US growth remains robust and China continues to stimulate its economy.

Gallo, who left Algebris Investments in 2022 to help set up Andromeda, believes that German bond yields are too low for such an environment, with 10-year rates likely to rise from 2.75% to 3% this year from about 2.5% now, he said. Gallo sees 10-year US Treasury yields rising to 5% and expects no rate cut from the Federal Reserve this year.

The report quotes Gallo in an interview: “It’s hard to see the ECB cutting as much as the market is pricing. The European economy might not be growing as fast as the US, but it’s not collapsing. Buying German bunds at current yield levels won’t give you any protection against inflation.”

Andromeda’s flagship credit long-short strategy, which focuses on relative value across bonds and credit while minimising potential volatility, had a net gain of 8% in 2023.

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