Policy makers are unlikely to raise borrowing costs in 2012, with benchmark rates to stay at or close to zero in the U.S. and Europe, according to Pacific Investment Management Co.’s Mohamed A. El-Erian.
Pimco advises investors stay in the five- to nine-year range in bonds for safety and to earn income, El-Erian, chief executive and co-chief investment officer of the world’s biggest manager of bond funds, said in a radio interview today on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.
“You’ll see policy rates in the U.S. and Europe floored at or near zero,” Newport Beach, California-based El-Erian said in the interview. “I don’t think there will be any appetite or need to raise interest rates in the U.S. and Europe.”
The Federal Reserve has said it will keep its target rate for overnight loans between banks between zero and 0.25 percent through mid-2013, and is now selling $400 billion of its short- term Treasuries and reinvesting the proceeds into longer-term government debt in a program traders dubbed Operation Twist.
The European Central Bank reduced its main refinancing rate twice last quarter, to 1 percent from 1.5 percent. It followed those moves by allotting 489 billion euros ($638 billion) of three-year loans to euro-region lenders.
“Both the Fed and the ECB are involved in the consequential terms of buying assets -- they are the market makers,” El-Erian said. “The rest of us have to decide what the implications are of having the big printing presses involved in the market. The long end will be the battle ground between credit risk -- as sovereign issues remain on the radar screen and growth concerns” persist.
U.S. Treasuries rose last year by the most since the 2008 financial crisis, gaining 9.8 percent, according to Bank of America Merrill Lynch indexes, on demand for safest assets.
The U.S. 10-year yield rose seven basis points to 1.95 percent at 10:48 a.m. in New York, according to Bloomberg Bond Trader prices. German 30-year government bonds fell, pushing yields above 2.5 percent for the first time in almost two weeks. German bonds returned 9.7 percent last year, also the most since 2008, when they made 12 percent, indexes developed by Bank of America Merrill Lynch show.
Overall for 2012, “it’s a very unpredictable outlook,” El-Erian said. “A lot will depend unfortunately on if policy makers can do the right thing at the right time. If you look at regions, you have to start with Europe. Europeans have to get ahead of their crisis, they haven’t as yet.”
Rising borrowing costs forced Greece, Portugal and Ireland to seek bailouts from the European Union and International Monetary Fund. Italy’s 10-year yields exceeded 7 percent last month, a level that preceded the request for aid from those three nations.
Growth in the 17-nation euro region will slow to just 0.3 percent this year from about 1.6 percent in 2011, the ECB forecast last month.
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