Federal Reserve Chairman Ben Bernanke stressed that central bank's timetable
for pulling back on its $85 billion-a-month bond-buying program hasn't been
determined and could be delayed if the economy continues to weaken. Mr.Bernanke kicked off two days of congressional testimony on the economy
and monetary policy by noting risks to growth, inflation and financial markets
that could alter the Fed's plan to start pulling back on the bond-buying
program, known as quantitative easing, later this year and end it by the middle
of 2014. "We need accommodative monetary policy for the foreseeable future," he said
more than once during the testimony before the House Financial Services
Committee, possibly his last appearance before Congress as Fed chief. His term
expires at the end of January. "Because our asset purchases depend on economic
and financial developments, they are by no means on a preset course."
U.S. markets strengthened modestly from the latest reassurances from Mr.
Bernanke. The Dow Jones Industrial Average was up 0.1% at 15472 shortly after
noon New York time, and the 10-year Treasury note gained in price, with the
yield falling to 2.496%.
Fed officials were jarred four weeks ago by the sharp market reaction to the
central bank's tentative timetable for winding down the program. Stocks
initially fell, though they've recovered, and long-term interest rates shots up.
Ever since, Fed officials have been trying to calm investors about the outlook
for the program, which is designed to push down long-term rates and push up
prices of stocks, homes and other assets.
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Pacific Investment Management Co., home to the world’s biggest bond fund, has turned negative over the government bond markets in Spain and Italy even as rival BlackRock Inc. (BLK) has scooped up the bonds from the debt markets’ spring swoon.
Andrew Balls, head of European portfolio management at Pimco, told The Wall Street Journal in a phone interview on Tuesday that he cut holdings on Spain and Italy after the global bond selloff kicked off at the start of May. The firm, a unit of Allianz SE of Germany, is now holding less of the two nations’ debt in his portfolios compared to benchmark indices.
“We are underweight Spain and Italy,” said Balls.
While the European Central Bank’s pledge of lender of last resort has pushed down euro zone bond yields from stress levels, Balls is worried about the euro zone’s struggling economy and that policymakers in the region haven’t made noticeable progress toward forming a banking and fiscal union.
“The systemic risk in the euro zone is not eliminated and the ECB’s resolve remains to be tested,” said Balls.
Reflecting Pimco’s cautious medium-term outlook on the euro zone, Balls said he continues to “stay clear” of government bond markets in Greece, Portugal and Ireland. Pimco also continues to underweight government bonds in France. In contrast, Pimco’s stance toward German government bonds is more favorable at “neutral to overweight.”
Bond yields in Spain and Italy jumped between May and June but this month the yields have fallen from the June peak as bond prices strengthened.
Both the ECB and the Federal Reserve in July have signaled that they will continue to keep monetary policy loose for a long period of time, which helped global bonds regain their footing.
BlackRock, the world’s biggest money manager, has scooped up shorter-dated government bonds in Spain and Italy over the past few weeks.
Rick Rieder, chief investment officer of fundamental fixed income and co-head of Americas fixed income at BlackRock, told The Wall Street Journal in phone interview on Monday that the ECB’s recent comments are likely to soothe worries over rise in short-term interest rates and the selloff made Spain and Italy debt attractive to buy.
Pimco’s Balls said he would consider buying Spain and Italy bonds again if their yield spreads widen significantly versus German bonds. He didn’t specify which spread levels would be a trigger for purchases.
Spain’s government debt have handed investors about 6% in total returns this year through Monday while Italy’s sovereign debt have gained 3%, according to data from Barclays. German’s government debt lost 0.16% over the same period while U.S. Treasury bonds lost 1.93%, according to Barclays.
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