Pimco to Daiwa Avoid Long Bonds as U.S. Approaches Fiscal Cliff

Investors from Pacific Investment Management Co. to Daiwa SB Investments Ltd. say long-term Treasuries are unattractive as the U.S. risks inflation and fiscal contraction.

Buyers of U.S. Treasuries should avoid 30-year securities as the Federal Reserve’s monetary stimulus risks stoking increases in asset prices, according to Tomoya Masanao, head of portfolio management for Japan at Pimco, which runs the world’s biggest bond fund. The fiscal health of the U.S., which faces more than $600 billion of potential tax increases and spending cuts from year-end, also warrants caution. The government is scheduled to sell $13 billion of bonds maturing in 2042 today.

“Caution of fiscal sustainability of the U.S. is a long- term view,” Masanao said at a Euromoney conference in Tokyo yesterday. “We should avoid long-end of the U.S. Treasury curve yielding below 3 percent if you ask if the fiscal situation is still there and ask if the Fed is trying to reflate the economy with massive amount of liquidity,” he said, adding that he prefers middle-term maturity debt.

Thirty-year rates were little changed at 2.88 percent as of 8:12 a.m. in London after falling 9 basis points, or 0.09 percentage point, over the past two days, according to Bloomberg Bond Trader data. Benchmark 10-year notes yielded 1.68 percent.

Treasuries Trimmed

Pimco reduced holdings of Treasuries for a third consecutive month to the lowest level since last October. The proportion of U.S. government and Treasury debt in its $278 billion Total Return Fund dropped to 20 percent of assets in September from 21 percent the prior month, according to data released on the Newport Beach, California-based company’s website.

Ten-year Treasury yields touched a record low 1.38 percent on July 25 after the Fed purchased $2.3 trillion of Treasury and mortgage-related debt from 2008 to 2011 in two rounds of so- called quantitative easing. The U.S. central bank in September began a third cycle, pledging to buy $40 billion of mortgage debt a month until the economic recovery is well established.

“Yields look far too low,” said Roger Bridges, who oversees $15.3 billion of debt in Sydney at Tyndall Investment Management Ltd., a unit of Japan’s Nikko Asset Management Co. The fiscal cliff is helping keep rates down, he said yesterday. JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon said in Washington yesterday that bond markets would spurn U.S. debt if lawmakers fail to address the nation’s deficit.

Lower Return

Thirty-year U.S. debt has gained 2.5 percent this year, according to Bank of America Merrill Lynch indexes, underperforming the 3.9 percent gain in the 7-to-10 year Treasury market. The securities returned 35.5 percent in 2011, more than double the 15 percent gain by middle-term Treasuries.

Yields on 30-year U.S. Treasuries will rise to 2.94 percent in the first quarter 2013, based on a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings. Analysts project 10-year yields will rise to 1.87 percent.

“The current level is very expensive,” Kei Katayama, who buys U.S. government debt in Tokyo for Daiwa SB, which manages the equivalent of $63.6 billion and is a unit of Japan’s second- biggest brokerage, said on Oct. 9. “The U.S. economy will keep growing slowly.” Ten-year yields will be 2 percent at year-end, Katayama said.

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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