BLBG:Treasuries Hold Gains Amid Stock Declines, Gross Warning
Treasuries remained higher following a gain yesterday as Asian stocks extended a global rout, spurring investor flight to safer assets.
U.S. debt demand was supported before German data forecast to show today business confidence in the euro region’s biggest economy touched a two-year low. Bill Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co., said risk markets are vulnerable as the “monetary bag of tricks empties.” Moody’s Investors Service cut ratings on 15 global banks yesterday, including Credit Suisse Group AG and UBS AG.
“Even Germany can’t avoid a slowdown, showing the instability of Europe’s financial system is affecting the region’s economy,” said Hiromasa Nakamura, who helps oversee the equivalent of $42 billion as an investor at Mizuho Asset Management Co. in Tokyo. “The weakening global economy is leading to risk aversion among investors, putting downward pressure on Treasury yields.”
Ten-year yields were little changed at 1.62 percent as of 7:23 a.m. in London after falling four basis points yesterday. The 1.75 percent notes due May 2022 traded at 101 5/32.
Yields on Japan’s 10-year bonds rose one basis point to 0.825 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. Rates have fallen 2 1/2 basis points, or 0.025 percentage point, since June 15, poised for the first weekly decrease since the period ended June 1.
The MSCI Asia Pacific Index (MXAP) of shares lost 1.1 percent today, following a 2.2 percent slide in Standard & Poor’s 500 Index in New York yesterday. The Stoxx Europe 600 Index dropped 0.5 percent.
Slower Growth
The Ifo institute may say its business climate index for Germany slid to 105.6 this month, according to a Bloomberg News survey of economists. That would be the lowest reading since March 2010. Munich-based Ifo is due to release the data today.
Moody’s downgraded Credit Suisse by three levels, cut UBS by two grades and reduced the ratings of 13 other lenders. These banks have “significant exposure to the volatility and risk of outsized losses inherent to capital-markets activities, Moody’s Global Banking Managing Director Greg Bauer said in a statement.
The moves by Moody’s ‘‘reflect the fragility of financial systems,” said Mizuho’s Nakamura. “Such weakness is likely to prevent banks from expanding lending, weighing on economies, so it’s a positive for bonds.”
Fed Outlook
The Federal Reserve cut its forecast for the U.S. economy on June 20, saying the lower range of its 2012 growth estimate is 1.9 percent, down from the April forecast of 2.4 percent.
The Fed bought $2.3 trillion of bonds in two rounds of so- called quantitative easing, or QE, from 2008 through 2011. Policy makers refrained from introducing a third round this week and instead extended through year-end their “Operation Twist” of selling shorter-term securities and buying the same amount of longer-term debt to lower borrowing costs. The $400 billion program was scheduled to end this month. The Fed expanded it by $267 billion.
Treasuries have returned 3.2 percent through yesterday since the end of March, according to Bank of America Merrill Lynch’s Treasury Master index, amid concern Europe’s debt crisis was worsening and U.S. growth was slowing. The S&P 500 Index (SPX) of U.S. shares lost 5.4 percent since March after taking account of reinvested dividends.
Gross, who manages $261 billion for the Pimco Total Return Fund, made his comment on risk markets in a Twitter posting. It was echoed by Aberdeen Asset Management Plc’s Peter Elston, who said on Bloomberg Television today his company is underweight stocks.
Contracting Economies
“We’re still certainly very comfortable running our underweight equity positions that we took out in March,” said Elston, the Singapore-based head of Asia-Pacific strategy and asset allocation at Aberdeen, which oversees about $270 billion. “Economies will continue to contract.”
Treasuries have declined this week, with 10-year rates gaining five basis points, as Antonis Samaras, leader of Greece’s New Democracy, established a three-party coalition government following two elections.
“We’ve avoided the worst situation in Greece, so the sense of relief lifted bond yields,” said Hideki Shibata, a senior strategist for rates and foreign exchange at Tokai Tokyo Research Center Co. “I expect yields to rise gradually.”
German Chancellor Angela Merkel, French President Francois Hollande, Italian Prime Minister Mario Monti and Spanish Premier Mariano Rajoy are set to gather in Rome today. The meeting is to help prepare for a June 28-29 European Union summit in Brussels at which leaders will discuss the path to further financial integration, including proposals for closer banking cooperation.
To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
