Pimco bailing on European bonds, piling into U.S. Treasuries

U.S. remains the flight-to-quality country, says fund firm's David Fisher; dollar still 'most-important reserve currency'

Jul 13, 2010 @ 7:03 am

By Bloomberg News

Pacific Investment Management Co., which runs the world's largest mutual fund, said it has been shifting funds to U.S. Treasuries and away from European debt over the past few months as it seeks the safest assets.

U.S. government bonds and the dollar are the main beneficiaries when investors are seeking security, David Fisher, Pimco's head of global product management, said on a conference call from Tokyo. Pimco is also recommending bonds in Canada, Australia, China, South Korea, Brazil and Mexico, he said.

“The U.S. remains the flight-to-quality country,” Fisher said. “The dollar remains the world's most important reserve currency. The euro is unlikely to take that mantle anytime soon. That makes U.S. Treasuries a default flight-to-quality asset.”

The combination of concern about potential defaults in Europe and the lowest U.S. inflation rate in four decades sent Treasuries surging in 2010. U.S. government securities returned 5.9 percent in the first half, the best start to a year since 1995, according to Bank of America Merrill Lynch indexes.

Fisher's comments echo those of Bill Gross, Pimco's co- chief investment officer, who said in June that he was favoring Treasuries as a fiscal crisis in Europe worsened.

Investors should avoid the bonds of Greece, Portugal, Spain and Italy, Fisher said on the conference call.

Inflation won't be a problem in the U.K. and other nations in Europe, the U.S. and Japan, and this will keep central banks in those countries from raising interest rates any time soon, Fisher said.

“The near-term risk is actually toward disinflation rather than inflation in most of these countries,” Fisher said. “Because interest rates are likely to remain low from central banks, we think that bonds can provide relatively attractive returns despite the very low starting level of yields.”

The yield on the benchmark 10-year Treasury fell three basis points to 3.04 percent as of 8:18 a.m. in London, according to BGCantor Market Data. The yield slid to 2.88 percent on July 1, the lowest since April 2009.

The U.S. consumer-price index dropped 0.1 percent in June, a third monthly decline, according to a Bloomberg survey before the Labor Department's July 16 report. Excluding food and energy, core consumer prices rose 0.9 percent from a year earlier, matching the smallest annual gain since 1966, a separate Bloomberg survey showed.

Slowing inflation helps preserve the value of a bond's fixed payments.

Gross's $234 billion Total Return Fund handed investors a 12 percent gain in the past year, beating about three-fifths of its competitors, according to data compiled by Bloomberg. Pimco, based in Newport Beach, California, has about $1.1 trillion in assets and is a unit of Munich-based insurer Allianz SE.

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