Allianz CEO Says U.S. Yields Underprice Default RiskZachary Tracer, Daniel Kruger and Oliver Suess
Treasury yields that rose a percentage point this year still fail to reflect the risk that the government of the world’s largest economy may default, said Michael Diekmann, chief executive officer of Allianz SE.
“They’re already paying a price, but it’s much too low,” Diekmann, 58, said in an interview today at Bloomberg’s headquarters in New York. The U.S. Treasury is paying about 60 extra basis points, or 0.60 percentage point, to borrow money, stemming from concern the U.S. won’t have money to meet its obligations, said Diekmann, who heads Europe’s biggest insurer, which owns Pacific Investment Management Co., the world’s largest manager of bond funds.
Lawmakers in Washington are locked in a dispute about spending and President Barack Obama’s health care reform law that’s shuttered the government and prevented an increase in the nation’s $16.7 trillion debt limit. Without action, the U.S. would run out of borrowing authority Oct. 17, threatening the ability to meet obligations including interest payments.
“Everybody is looking at the U.S. and saying ’wow, we don’t get it, these guys have all the means to get out of this whole trouble,’” Diekmann said. “So why do the politicians play this game? People don’t understand that.”
Yields on benchmark Treasury 10-year notes rose three basis points to 2.72 percent at 12:48 p.m. in New York, according to Bloomberg Bond Trader prices. The yield traded as low as 1.61 percent this year.
The U.S. pays more than 13 developed nations to borrow money for 10 years, according to data compiled by Bloomberg. Japan pays the least at 0.66 percent, while the U.S. pays just more than Belgium, which pays 2.64 percent and just less than the U.K. at 2.80 percent.
During the past year, U.S. 10-year yields have traded lower than all except five of the developed nations, the data show.
Allianz has an investment portfolio of 504.1 billion euros ($680.4 billion), with 90 percent in bonds as of June 30. About 5 percent of Allianz’s 169.6 billion euro portfolio of government debt is invested in the U.S., according to the company’s second-quarter earnings presentation. About a fifth is in French debt, and 16 percent in German bonds.
Diekmann said fiscal imbalances in the U.S. are unlikely to be resolved even if Congress reaches a short-term compromise this week. Bill Gross, co-chief investment officer of Newport Beach, California-based Pimco, has said investors should buy shorter-maturity Treasuries as an opportunity to profit from default concern.
Rates on Treasury bills due through the end of the year dropped after hitting highs last week, while those maturing in February rose.
The rate on bills due Oct. 31 fell four basis points to 0.28 percent after rising to 0.37 percent on Oct. 10. It has averaged 0.05 percent this year. The rate on bills due Feb. 20 rose nine basis points to 0.12 percent compared with 0.02 percent a week earlier,
BlackRock Inc., JPMorgan Chase & Co. and Fidelity Investments have said their money funds are free of U.S. Treasury maturities that may be affected by a U.S. default. Money-market funds are a low-risk parking spot for cash, and typically invest in short-term obligations.
“Their selling begets opportunistic buying on the part of Pimco,” Gross said in an Oct. 10 interview on Bloomberg Television. “We’re picking up pennies on the street. This is a particular penny that we think is risk-free.”
An emerging agreement would suspend the U.S. debt limit to Feb. 7, fund the government through Jan. 15 and require a House-Senate budget conference by Dec. 13, according to a person familiar with the talks.
“They don’t resolve it, the problem stays,” Diekmann said. “Then it’s prolonged until February.”
Senate Majority Leader Harry Reid rejected a House plan to halt the fiscal impasse, as he sought to build support for a Senate agreement. The House proposal, which Republican leaders detailed to their members earlier today, “can’t pass the Senate and won’t pass the Senate,” said Reid, a Nevada Democrat.
A “serious default” in which the U.S. doesn’t pay its debt for months would create risks that are difficult to manage, Diekmann said. Allianz can’t avoid holding Treasuries because they act as “anchor investments,” he said.
“Frankly, if there would be a serious default situation in the U.S., it’s just as unmanageable as a serious default situation in Germany,” Diekmann said. “All the risk management actions you can take are not going to work.”