"U.S. Bank Plan May Fail, Bonds Will Rally, PGI Says (Update1)
By Theresa Barraclough
March 24 (Bloomberg) -- Treasury Secretary Timothy Geithner’s plan to remove toxic assets from banks’ balance sheets may fail, causing government bonds to rally, according to Principal Global Investors.
“In an environment of falling asset prices, people do not want to borrow to buy assets regardless of how cheap the finance is,” said Guthrie Williamson, a Sydney-based portfolio manager at PGI who helps oversee $228 billion globally. “Banks might not want to sell them at a price below where they are valuing them on their books as this is crystallizing a loss, while fund managers will want to buy them cheaply and they will have their own equity at stake.”
Stock-market rallies will be short-lived, he said. Japan’s 10-year yields will decline 16.5 basis points to 1.1 percent and similar Treasury yields will slide 41 basis points to 2.25 percent by June 30, he said.
Equities surged around the world after U.S. President Barack Obama said he is “very confident” the plan to use as much as $100 billion of the Treasury’s remaining bank-rescue funds to finance purchases of illiquid real-estate assets will unlock credit markets. The Standard & Poor’s 500 Index yesterday advanced by the most since October and the Nikkei 225 Stock Average increased for a second day today.
Bearish Risky Assets
“The equity market is on drugs,” Williamson said. “I am skeptical, bearish on risky assets and bullish on government bonds.”
The yield on 10-year U.S. Treasuries climbed two basis points to 2.67 percent today and similar-dated Japanese yields declined half a basis point to 1.26 percent. A basis point is 0.01 percentage point.
“Although stock markets reacted optimistically to the plan, the Japanese bond market hasn’t,” said Takashi Nishimura, a Tokyo-based analyst at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank by assets. “The bond market is very cautious about Geithner’s plan.”
Ten-year Treasury yields will climb to 2.76 percent and yields on similar-dated Japanese debt will slide to 1.25 percent, according to Bloomberg surveys of economists, which place heavier weightings on more recent forecasts.
Should Williamson’s predictions prove accurate, investors who buy U.S. debt today would make a return of 4.2 percent by the end of June, according to Bloomberg calculations. Japanese bond investors would make a 1.8 percent return, Bloomberg calculations show."