Inflated U.S. yields underprice default risk, Allianz CEO says

Treasury yields that rose a percentage point this year still fail to reflect the risk that the government of world's largest economy may default, said Michael Diekmann, the chief executive officer of Allianz SE.
OCT 24, 2013
Treasury yields that rose a percentage point this year still fail to reflect the risk that the government of world’s largest economy may default, said Michael Diekmann, the chief executive officer of Allianz SE. “They’re already paying a price, but it’s much too low,” Mr. Diekmann, 58, said in an interview Tuesday. 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, he said. 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,’” said Mr. Diekmann, who heads Europe’s biggest insurer. “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% on Tuesday, according to Bloomberg Bond Trader prices. The yield traded as low as 1.61% 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%, while the U.S. pays just more than Belgium, which pays 2.64% and just less than the United Kingdom at 2.80%. During the past year, U.S. 10-year yields have traded lower than all except five of the developed nations, the data show. Mr. Diekmann, whose company owns Pacific Investment Management Co., the world’s largest bond manager, emphasized fiscal imbalances in the U.S. that he said are unlikely to be resolved even if Congress reaches a short-term compromise this week. Bill Gross, co-chief investment officer of Pimco, has said investors should buy shorter-maturity Treasuries as an opportunity to profit from default concern. (Bloomberg News)

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