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PIMCO Total Return Fund
Treasuries rose for the first time in four days after reports showed German exports and industrial production dropped, boosting demand for U.S. government securities as a haven from Europe’s sovereign-debt crisis.
Benchmark 10-year yields fell from near the highest level in five weeks amid concern Greece will need more support from European Union leaders after Standard & Poor’s cut the nation’s credit-rating outlook. Investors who took advantage of a rally in riskier markets should cut holdings in favor of safer assets, said Mohamed El-Erian at Pacific Investment Management Co., home to the world’s biggest bond fund. The Treasury is due to sell $24 billion of 10-year notes today.
“The big picture remains troubling and there’s still a lot of uncertainty ahead as to how the euro debt crisis is going to be resolved,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “Safe assets such as Treasuries are going to remain in demand. Any selloff is likely to be brief.”
The 10-year yield fell two basis points, or 0.02 percentage point, to 1.61 percent at 7:02 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 gained 5/32, or $1.56 per $1,000 face amount, to 101 7/32. The yield increased to 1.64 percent yesterday, the highest level since July 2.
German exports, adjusted for work days and seasonal changes, dropped 1.5 percent in June from May, when they jumped 4.2 percent, the Federal Statistics Office said in Wiesbaden. Industrial production fell 0.9 percent from May, when it gained 1.7 percent, the Economy Ministry said in Berlin.
S&P lowered its outlook on Greece’s debt to negative from stable, which means it is more inclined to reduce its ranking for the nation. The government may fail to make the budget cuts required to receive its next aid payment from the European Union and the International Monetary Fund, the rating company said yesterday in a statement. Greece is ranked CCC by S&P, or eight levels below investment grade.
“This is an unusually uncertain time,” said El-Erian, chief executive officer at Pimco, which is based in Newport Beach, California. “It’s not just Europe. Let’s not forget there is a fiscal cliff in the U.S. Let’s not forget geopolitics is heating up in Iran again,” he said yesterday on Bloomberg Radio’s “Hays Advantage” with Kathleen Hays.
The record-size $263 billion Total Return Fund (PTTRX) had 52 percent of its assets in mortgage-related debt, 35 percent in Treasuries and 13 percent in investment-grade corporate bonds as of June 30, according to Pimco’s website.
The year-end “fiscal cliff” of higher taxes and spending cuts clouds the economic outlook, El-Erian said. The nation added more jobs in July than economists expected, though the unemployment rate rose to 8.3 percent from 8.2 percent, a Labor Department report showed Aug. 3.
Treasuries extended gains after the Bank of England reduced its growth forecast and said inflation will be below its target in two years as the euro-area crisis and the U.K. fiscal squeeze weigh on demand.
The U.K. central bank sees annual gross-domestic-product growth of about 2 percent in two years, compared with a projection in May of 2.5 percent. It sees consumer-price growth at about 1.6 percent by then, below its 2 percent goal.
The U.S. central bank is scheduled to buy as much as $2 billion of Treasuries due from February 2036 to May 2042 today as part of its efforts to support the world’s biggest economy, according to the Fed Bank of New York website.
The Fed is swapping shorter-term Treasuries in its holdings with longer-dated debt to put downward pressure on long-term borrowing costs.
Treasuries have returned 2 percent this year as of yesterday, according to Bank of America Merrill Lynch indexes. The MSCI All-Country World Index (MXWD) of stocks handed investors a 9.7 percent gain in the period including reinvested dividends, according to data compiled by Bloomberg.
The 10-year notes scheduled for sale today yielded 1.66 percent in pre-auction trading, compared with the record low of 1.459 percent set at the previous auction on July 11.
Investors bid for 3.61 times the amount of debt offered last month, the second-highest level according to data compiled by Bloomberg that go back to 1993.
Direct bidders buying for their own accounts purchased a record 45.4 percent of the notes, based on data back to 2003. Indirect bidders, the investor group that includes foreign central banks, bought 40.6 percent of the debt.
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