July 10 (Bloomberg) -- DWS Investment GmbH, Germany’s biggest mutual fund manager, is shunning Treasuries and buying bunds in a bet that President Barack Obama’s record fundraising makes owning U.S. government debt too risky.

German bonds will outperform Treasuries as a more prolonged recession in Europe drives investors to the relative safety of the region’s government debt, said Markus Kohlenbach, head of international fixed income at the Frankfurt-based company, which oversees 231 billion euros ($321 billion) in assets. In coming years bondholders will also be more concerned about an oversupply of U.S. securities than they are about European debt, he said.

“We see significantly less risk owning German bonds than we do U.S. Treasuries,” Kohlenbach said in an interview. “In the U.S., unemployment has risen quite significantly, but this hasn’t happened in Germany yet. When it does, we expect the bond market to rally.”

The U.S has more than doubled note and bond offerings to $963 billion in the first half, four-fifths of the $1.2 trillion that ING Groep NV forecasts euro-region governments will sell in the entire year. The U.S. may offer another $1.1 trillion in the second half, according to Barclays Plc, one of the 17 primary dealers that are obligated to bid at Treasury auctions.

German bunds have outperformed U.S. government debt this year as the European Central Bank lagged behind the Federal Reserve in efforts to revive its contracting economy. German debt returned 0.4 percent, compared with a 3.8 percent loss for Treasuries, according to Merrill Lynch & Co. indexes.

Unemployment Rate

Ten-year Treasuries yielded 6 basis points more than bunds as of 7.36 a.m. in New York. The German 10-year securities yielded 74 basis points more than U.S. government debt at the end of last year.

The unemployment rate in Germany rose to 8.3 percent in June, from a 17-year low of 7.6 percent in November. The U.S. jobless rate climbed to 9.5 percent in June, the highest since August 1983. By the end of the year, the rate may reach 10 percent, according to the median of 63 forecasts in a Bloomberg survey.

The ECB cut the main refinancing rate to a record low of 1 percent in May. The Fed reduced its target for overnight loans between banks to a range of zero to 0.25 percent in December.

“We don’t think we’re going to see new record lows in bund yields, but we definitely prefer owning them to U.S. Treasuries,” Kohlenbach said.

While raising its forecast for the U.S. economy, the Organization for Economic Cooperation and Development cut its expectation for the 16-nation euro area last month. The region faces a “grim outlook” and a contraction of 4.8 percent this year, compared with the 4.1 percent predicted in March, it said.

‘Major Issue’

The world’s largest economy will contract 2.8 percent this year and grow 0.9 percent next year, the Paris-based organization said, revising its forecast from declines of 4 percent this year and zero growth in 2010.

Concern that governments have been issuing too much debt that may overwhelm investor demand will be the key preoccupation for the bond market in a couple of years, Kohlenbach said.

“The potential imbalance between bond supply and investor appetite will be a very major issue facing the market, but it’s something that’s only going to come to the fore once the crisis is over,” Kohlenbach said. “This will be the key element to watch out for in 2010 and 2011. Supply concerns will be mostly in the U.S. rather than Europe.”

Overblown Concern

The U.S. has spent or pledged, via loans, guarantees and asset purchases, the equivalent of 80 percent of its $14 trillion economy, according to an April 26 report by the International Monetary Fund. Germany, France and Spain, which account for 60 percent of the euro region’s economy, have spent or pledged 22 percent, 19 percent and 23 percent of their gross domestic product.

DWS, a unit of Deutsche Bank AG, has also been buying bonds of so-called peripheral European countries such as Ireland and Greece, betting concern that the recession could break apart the European monetary union was exaggerated.

Ireland’s economy will shrink by about 8 percent this year, according to the government, faster than any other in the euro region. The country had its top credit rating lowered by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings this year.

The difference in yield, or spread, between Ireland’s 10- year bonds and equivalent German debt narrowed to 223 basis points, from a high of 284 basis points on March 19.

The yield spread between German and Greek 10-year debt has declined to 173 basis points, from a high of 300 basis points on March 12.

“The concern earlier this year that the EU would break up was overblown,’ Kohlenbach said. ‘‘We haven’t seen such good entry points into non-core sovereigns in a long time. The blow out in non-core bond yields was an overreaction to the uncertainty.”

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

Last Updated: July 10, 2009 07:59 EDT