'Savage bear market' for Treasuries possible: Goldman's O'Neill

U.S. government bonds may post losses like those seen in 1994 if “vigorous” economic growth causes the Federal Reserve to change policy, said Jim O'Neill, chairman of Goldman Sachs Asset Management. “I've been around for 30 years and that includes having gone through 1994 when we probably had about the only savage bear market in bonds” over those three decades, O'Neill, 53, said in an interview in London today on Bloomberg Television's “On The Move” with Francine Lacqua. “There are a number of circumstances that could lead to a repeat of that, probably the most important one being a very dramatic recovery in growth.” Treasuries lost 3.3 percent in 1994, according to data from Bank of America-Merrill Lynch & Co., as the Fed increased interest rates in response to inflation threats. Treasuries returned 5.9 percent last year even after a 2.7 percent loss in the fourth quarter, the Bank of America-Merrill Lynch data show. “If we have continued signs of a vigorous U.S. recovery, at some stage the Fed's going to change their view of the world, and that's what caused the damage in 1994,” O'Neill said. “So I'm very mindful and on the lookout for that because it might not be very pleasant if it happens.” O'Neill also said the U.S. won't suffer the same fate as debt-stricken euro-area members over its budget deficit. The European Union and the International Monetary Fund last year approved rescue packages for Ireland and Greece after concerns about mounting shortfalls pushed up bond yields and eroded confidence in the single currency. European leaders meet on March 11 at a special 17-nation euro-region summit to agree on a comprehensive anti-crisis package to resolve the region's debt crisis. “I don't think we have a sovereign-debt crisis in Europe. It's a crisis about European Monetary Union structure and leadership,” O'Neill said. “It's a test in some ways of Germany's desire and if Germany stands behind this thing in March full square and simple, European bonds will turn out to be one of the best investments this year.” --Bloomberg News--