Treasuries Favored Over Bunds Before Jackson Hole by Carmignac

Carmignac Gestion has switched to Treasuries from German debt on a bet that 10-year U.S. yields have further to fall because the Federal Reserve will support the world’s largest economy as it faces the risk of recession.

Treasury yields “will stay low and have a chance to go lower from current levels,” said Rose Ouahba, who helps oversee the equivalent of $72 billion as head of the Paris-based fund’s fixed-income team. “The U.S. will have very low growth and we are facing the risk of recession, even though it’s not our central forecast. Monetary policy will stay accommodative.”

Treasuries have handed investors a 3.1 percent return this month, Bank of America Merrill Lynch data show, as investors seek the relative safety of government debt on signs the U.S. economy is faltering and after the Fed pledged on Aug. 9 to keep borrowing costs near zero until at least mid-2013.

They’ve been boosted by speculation Fed Chairman Ben S. Bernanke will signal more steps to spur the economy through debt purchases when he speaks Aug. 26 in Jackson Hole, Wyoming. Bernanke used the Kansas City Fed’s annual conference for global central bankers last year to hint at a second round of so-called quantitative easing, in which the Fed purchased $600 billion of Treasuries from November 2010 to June.

Bonds Allocation

Ten-year Treasury yields were 2.14 percent at 12:25 p.m. in London. They fell to a record 1.9735 percent on Aug. 18.

Carmignac increased its holdings of Treasuries at the expense of bunds at the end of July, when the 10-year yield was around 2.80 percent, Ouahba said. The fund bet that U.S. policy makers would agree to raise the nation’s debt ceiling and that this would narrow the yield difference, or spread, between U.S. and German 10-year securities.

The 10-year Treasury note yield spread over similar-maturity German bunds has narrowed to four basis points today, from 26 basis points on July 29.

“We believed that the U.S. would find an agreement by Aug. 2, so it made sense to shift from German exposure to U.S. exposure,” Ouahba said.

The 25 billion-euro Carmignac Patrimoine fund had 11 percent of its bond allocation in Treasuries by the middle of August, up from 4.5 percent in mid-July, it said by e-mail. Of Carmignac’s $72 billion of assets under management, 46 percent was in fixed-income securities as of June 30, according to the company’s website.

Slowing Growth

U.S. growth in the second quarter slowed to a pace that has typically been followed by a contraction within a year, according to data since World War II used in an April study by Jeremy Nalewaik, a Fed board staff economist. Gross domestic product, adjusted for inflation, cooled to a 1.6 percent rate in the second quarter from a year earlier.

Growth is “considerably slower” than anticipated, the Federal Open Market Committee said in a statement on Aug. 9. The Philadelphia Fed’s general economic index dropped to minus 30.7 this month, the lowest since March 2009, when the economy was in recession.

Carmignac isn’t fazed by Standard & Poor’s Aug. 5 decision to cut the U.S. credit rating to AA+ from AAA, Ouahba said.

“The action of S&P was more a political message,” she said. “We don’t think this is going to be an issue, especially because the Fed has the option to print money in case of a supply shock in the U.S. market.”

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