Bloomberg News

Treasuries Set for ‘Perverse’ Gain on Downgrade, Baring Says

July 29, 2011

July 29 (Bloomberg) -- Baring Asset Management is “bullish” on Treasuries on the expectation that the turmoil caused by a U.S. credit-rating downgrade will cause investors to flock to the nation’s government bonds.

Treasuries are likely to gain as the downgrade hurts government-sponsored enterprise paper, such as the $5.2 trillion market for agency mortgage bonds issued by Fannie Mae and Freddie Mac, Toby Nangle, London-based director of asset allocation at Barings, wrote in response to e-mailed questions. While they may receive a “perverse” short-term gain, the U.S.’s deteriorating fiscal position means the dollar will fall and Treasury yields will eventually rise, he said.

“The immediate impact of a downgrade would be a bid for Treasuries,” said London-based Nangle, who helps oversee about $53 billion. “The allure of Treasuries will dampen in the medium term as the reserve currency status is undermined. With persistent U.S. fiscal weakness, there is no reason why Treasuries should rally in the long term.”

Yields on benchmark 10-year Treasuries have fallen 89 basis points, or 0.89 percentage point, since reaching a nine-month high of 3.77 percent on Feb. 9. The securities yielded 2.88 percent as of 2:17 p.m. in London today.

The administration of President Barack Obama says the Treasury’s borrowing authority runs out Aug. 2 and that it may not be able to pay all of its bills after that date unless the nation’s $14.3 trillion debt limit is raised. The public will be briefed no earlier than when financial markets close today about priorities for paying the nation’s obligations if the U.S. debt limit isn’t raised by then, a Democratic official said.

BlackRock Inc., Franklin Templeton Investments, Loomis Sayles & Co., Pacific Investment Management Co. and Western Asset Management are among those warning the U.S. may lose its top-level debt rating even if the debt limit is raised.

--Editors: Matthew Brown, Keith Campbell

-0- Jul/29/2011 11:59 GMT

-0- Jul/29/2011 12:00 GMT

To contact the reporter on this story: Emily Blewett in London at eblewett@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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