Investors Need Clarity From Europe to Take on Risk, Pimco Says

Thursday, 03 Nov 2011 03:00 PM

 

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Investors should “fortify” their portfolios with high-quality bonds until European leaders provide more details on how they will contain their debt crisis, said Tony Crescenzi of Pacific Investment Management Co.

Europe’s financial turmoil has deepened, dominating a Group of 20 summit at the French resort of Cannes, as Greece’s government neared collapse and Italy came under renewed pressure to prove its creditworthiness.

“Only after we’ve got a little more clarity from the G-20, from Europe, on what the plan is for propping up banks, and ring-fencing Italy and Spain, will it be a better period to consider taking greater amounts of risk than one should consider now,” said Crescenzi, a portfolio manager at Newport Beach, California-based Pimco, the world’s biggest bond fund, in a radio interview on “Bloomberg on the Economy” with Sara Eisen and Michael McKee.

Investors should buy corporate bonds that are higher in the capital structure, issued by companies that lead their industries and own hard assets, Crescenzi said. Investment-grade U.S. corporate debt returned 1.75 percent last month, the biggest gain since July, according to Bank of America Merrill Lynch index data.

“You can engage in the bond market, you can engage in risk assets, but you need to fortify your portfolio with the assets you buy,” said Crescenzi.

Transitional Government

Greek Prime Minister George Papandreou reached out to his political opposition about setting up a transitional government, indicating an accord would secure aid and remove the need for a referendum on euro membership. His call for a national vote on a week-old bailout package from Europe split his party and led European leaders to suspend aid.

The European Central Bank offered relief, unexpectedly cutting its benchmark interest rate a quarter-percentage point to 1.25 percent.

Government bonds of Germany, the U.S. and Australia provide “an insurance policy against” the potential for riskier assets to fall in value, Crescenzi said. Treasuries have returned 0.8 percent the first two days this month after losing 0.8 percent in October, Bank of America Merrill Lynch index data show.

German bunds gained 1 percent in the first days of November, while Australian debt returned 1.1 percent.

Yields on Greek 10-year bonds rose as high as 26.9 percent today.

“Many in the markets gave up on Greece a long time ago,” Crescenzi said. “Pimco has been void of Greece and had no position in Greece and the periphery for a very long time. It’s been very clear that the policy solutions that need be implemented to fix the problems have not either been introduced or they’ve been implemented poorly.”

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