Bonds Prove to Be Only Investment Winners for the First Time Since 2008

Tuesday, 01 May 2012 02:32 PM

 

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For the first time since the start of 2008, bonds were the only investments to provide positive returns amid renewed concern the global economy is slowing and as widening deficits in Europe threaten contagion.

Fixed-income assets -- from Australian government debt to U.S. Treasuries to global junk bonds -- gained 0.7 percent last month including reinvested interest, according to Bank of America Merrill Lynch index data. The MSCI All-Country World Index of stocks lost 1.1 percent including dividends while the Standard & Poor’s GSCI Total Return Index of metals, fuels and agricultural products fell 0.5 percent. The U.S. Dollar Index dropped 0.3 percent.

“Concerns of an economic slowdown and renewed risks over Europe are the biggest drivers,” Anthony Valeri, a market strategist in San Diego at LPL Financial, which oversees $330 billion, said April 26 in a telephone interview. “There’s renewed concerns about Europe, and Spain in particular.”

Investors sought the perceived safety of fixed-income investments after U.S. job growth in March failed to meet economists’ forecasts and amid growing concerns that European leaders will fail to manage their debt loads. Joblessness in the euro area probably rose to 10.9 percent last month, the highest since 1997, according to economists surveyed by Bloomberg.

Austerity Opposition

In Europe, growing political opposition to austerity measures forced Italy to delay its goal of balancing the budget by one year to 2014, joining Spain in missing fiscal targets amid a worsening recession. French President Nicolas Sarkozy may be toppled in a May 6 vote and the Netherlands will hold elections in September after the cabinet resigned over spending cuts and tax increases.

The Washington-based International Monetary Fund said in an April 17 report that the world economy will expand 3.5 percent this year, down from 3.9 percent in 2011, as growth in Europe shrinks 0.3 percent.

“Europe came to the forefront of a lot of people’s concerns,” Matthew Duch, a taxable fixed-income money manager in Bethesda, Maryland, at Calvert Investments Management Inc., which oversees more than $12 billion, said April 27 in a telephone interview. “Driving this month has been a reluctance to invest in risk.”

Bank of America Merrill Lynch’s Global Broad Market Index, which tracks more than 19,600 securities with a market value of $43.2 trillion, rebounded from a 0.14 percent loss in March, bringing its year-to-date return to 1.9 percent. Average yields fell to 2.02 percent from 2.12 percent a month ago.

Treasuries Gain

The last time bonds were the only assets with positive returns was January 2008. Government debt globally returned 0.7 percent in April, a Bank of America Merrill Lynch index showed.

U.S. Treasuries, perceived as the safest of assets, gained 1.5 percent, led by a 4.8 percent return for 30-year bonds in their best month since September. Yields on Treasuries due in 10 years, which were 1.91 percent as of 7:55 a.m. in London, are forecast to climb to 2.26 percent in June 2012, according to the median estimate of 78 economists surveyed by Bloomberg.

Portugal’s bonds were the best performers among the 26 sovereign markets tracked by Bloomberg and the European Federation of Financial Analysts Societies, jumping 6.3 percent. Debt of Italy and Spain were the worst, losing more than 2 percent each.

Corporate Bonds

Investment-grade corporate securities gained 0.8 percent. High-yield, high-risk, or junk, bonds returned 0.7 percent. Speculative-grade debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at S&P.

The U.S. Dollar Index, which Intercontinental Exchange Inc. uses to track the currency against the euro, yen, pound, Swiss franc, Canada dollar and Swedish krona, fell to 78.78 from 79 at the end of March.

The index peaked last month at 80.177 on April 5, a day before the U.S. Labor Department said employers created 120,000 jobs in March. The median estimate of economists surveyed by Bloomberg was for an increase of 205,000.

Federal Reserve Chairman Ben S. Bernanke said last week the central bank stands ready to add to its stimulus measures if necessary, which for many investors means the printing of more dollars to buy bonds.

After his comments, a U.S. government report showed the economy expanded at a 2.2 percent annual pace in the first quarter, down from 3 percent in the final three months of 2011. The median forecast of economists surveyed by Bloomberg News called for a 2.5 percent rise.

‘Cost-Reduction Mode’

“I’m going to question to whether consumer spending is sustainable over the long term,” said Calvert’s Duch, who favors intermediate-maturity Treasuries. “Employers are still in cost-reduction mode. Employees are feeling that they don’t have the leverage, and wages are going to remain static for a long period of time.”

Among the dollar’s 16 most-traded counterparts tracked by Bloomberg, the yen appreciated the most, strengthening 3.82 percent, followed by Singapore’s dollar at 1.66 percent. The biggest loser was Brazil’s real, which depreciated 4.27 percent, data compiled by Bloomberg show.

The euro weakened 0.78 percent against the dollar. The 17- nation currency was the second-worst performer among the 10 developed-nation exchange rates tracked Bloomberg Correlation- Weighted Currency Indexes, losing 1.05 percent. Sweden’s krona depreciated 2 percent.

Currency Forecasts

Currency analysts forecast the euro will end the second quarter at $1.29, 2.7 percent lower than where it is now. The yen will be at 82 per dollar by the end of June, or 2.8 percent weaker, according to strategists’ estimates.

Greece’s debt is 165 percent of gross domestic product, while that of Italy is 120 percent and Ireland and Portugal’s is 108 percent, according to data compiled by Bloomberg. Germany’s ratio is 81 percent and Spain’s is 69 percent.

“I’m not convinced that Europe is OK,” Stephen Mahoney, a money manager in Philadelphia at Glenmede Investment Management, which oversees more than $20 billion, said April 27 in a telephone interview. “There’s always going to be contagion.”

Mahoney said he favors investment-grade debt and bonds of industrial corporations. He is “underweight” financial-company debt, meaning he owns a smaller percentage of the securities than is contained in his benchmark index.

Commodities, as measured by the S&P GSCI Total Return Index, fell for the second consecutive month after losing 2.4 percent in March. Sugar was the biggest loser.

Sugar, Gasoline

Sugar plunged 11 percent on the ICE Futures U.S. in New York, the biggest monthly decline since September, while the 6.1 percent drop in gasoline on the New York Mercantile Exchange was the first since November. Cattle futures on the Chicago Mercantile Exchange slipped to a nine-month low on April 24, as the U.S. reported its first case of mad cow disease since 2006.

Natural gas was the biggest winner, rallying 7.5 percent on the Nymex for the largest monthly advance in a year, partly as unusually cool weather. Soybeans jumped 7.3 percent on the Chicago Board of Trade, as drought-reduced crops in South America signaled an 11 percent decline in global output, the most since 1984. Prices reached $15.07 a bushel on April 30, the highest since July 2008.

Crude oil futures rose 1.8 percent to $104.87 a barrel in New York on speculation that increased U.S. consumer spending and incomes will help boost demand. Gold retreated for the third straight month in the absence of further quantitative easing by the Federal Reserve.

Stocks Retreat

The MSCI All Country World Index of stocks retreated for the first time since December after rallying 11.3 percent in the January through March period. The MSCI index is valued at 14.8 times reported profit, 16.4 percent below the average from the past five years, according to data compiled by Bloomberg.

The S&P 500 lost 0.75 percent while the Dow Jones Industrial Average rose 0.01 percent. From AT&T Inc. to 3M Co., about 74 percent of the companies in the S&P 500 that reported quarterly results since April 10 topped the average analyst estimate, data compiled by Bloomberg as of April 24 showed.

While corporate earnings “have come in strong, ‘‘the economy is going to just sputter along here,’’ Glenmede’s Mahoney said. ‘‘You have to be a little bit cautious.’’

Second Recession

Spain’s economy contracted in the first quarter, putting the euro region’s fourth-largest economy into its second recession since 2009, the Madrid-based National Statistics Institute said yesterday.

The Italian government, which had vowed to balance the budget in 2013, now expects a shortfall of 0.5 percent of gross domestic product next year, the Cabinet said April 18 in an e- mailed statement after meeting in Rome to revise its three-year economic plan. The deficit of 0.1 percent previously estimated for 2013 won’t be reached until 2014.

‘‘Contagion is in the air,” David Blanchflower, an economics professor at Dartmouth College and former Bank of England policy maker, said April 26 in a telephone interview. “This is the inevitable consequence of failed austerity.”


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