Bloomberg News

U.S. Debt Rally to Endure on Crisis, UBS’s Bory Says: Tom Keene

June 08, 2012

Treasury bonds and high-grade corporate debt are set to extend gains with a bailout of Spain imminent following talks this weekend by European leaders, said George Bory, chief corporate credit strategist at UBS AG.

Yields on benchmark 10-year government notes will test new lows after dropping below 1.5 percent for the first time June 1, Bory said in a radio interview on “Bloomberg Surveillance” with Ken Prewitt and Tom Keene. Bonds of U.S. companies with investment-grade ratings are also poised to rally, tightening their spread to government benchmarks by as much as 50 basis points, or 0.5 percentage point, this year, Bory said.

“You have a clear crisis out of Europe, a credit crisis across the board, which is forcing investors into safe-haven securities and then in addition to that, the growth story in the U.S. is clearly decelerating,” Bory said. “We could go a little bit lower if things don’t improve out of Europe. The prospect of perhaps some Fed intervention could push 10-year yields meaningfully below 1.5 percent.”

Spain may become the fourth European sovereign to receive emergency aid as it struggles to shore up confidence in its banks and plug a budget deficit. Investors are speculating whether the Federal Reserve will add more stimulus when the Federal Open Market Committee meets on June 19-20. High-grade corporate debt will benefit from the flight to quality, Stamford, Connecticut-based Bory said.

“Let’s say Treasuries drop a little bit and the economy slows but doesn’t collapse. I would expect that spread differential between corporates and Treasuries to narrow,” Bory said. “You could see bond yields for investment-grade corporates below 3 percent. I think you could see 25, maybe 50 basis points of tightening.”

Tough Target

Government bond yields fell to a record June 1 after the Labor Department reported U.S. employers added 69,000 jobs in May after an increase of 77,000 the previous month. The rally in Treasury bonds means the minimum return money managers typically target is eluding them, Bory said.

“Six percent’s tough to come by when the government is only paying you 1.5 percent,” he said. “Many of those investors are falling short of that target yield.”

European Central Bank Vice President Vitor Constancio said today that a Spanish request is “awaited” and will be “exclusively directed at the recapitalization of banks.” The bid may come as soon as tomorrow when finance ministers hold a conference call, according to a person familiar with the plans who declined to be identified because the matter is confidential.

The Fed plans to wind down at month-end its so-called Operation Twist program to swap $400 billion of short-term debt with long-term debt to lengthen the average maturity of its holdings.

“You’re owning Treasuries for safety and for liquidity,” Bory said. “It’s a safe place to hide. I think your absolute gain is somewhat limited.”

To contact the reporters on this story: Cecile Gutscher in Toronto at; Tom Keene in New York at

To contact the editor responsible for this story: Dave Liedtka at

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