Tags: pimco | foreign | bonds

Pimco Recommends Foreign, Short-Term Bonds

By Dan Weil   |   Tuesday, 09 Jun 2009 01:30 PM

Money management firm Pimco recommends foreign and short-term bonds, as huge monetary and fiscal stimulus raise the threat of inflation.

Those views are part of the bond giant’s secular outlook, which covers the next three to five years.

Deflation represents the main risk in the short term and then inflation in the long term, the outlook says.

The deflation concern stems from “the severity of the collapse in global demand and the resulting large gap in actual versus potential output,” the report states.

“Inflation risks will come to the fore later … as potential output becomes more constrained … and policymakers struggle to withdraw the massive levels of monetary and fiscal stimulus that have recently been introduced.”

The case for foreign bonds: “U.S. bonds, especially Treasuries, will face greater sovereign risk, as the U.S. debt burden mounts and inflation expectations start to rise later [on],” the report states.

As for short-term bonds, their yields “are likely to be anchored near current low levels for a longer period than what is now priced into forward interest rate curves,” the study says.

“Policy makers in many countries are likely to overstay with loose monetary policy.”

The report also warns that the dollar may fall.

Others share PIMCO’s concerns.

San Francisco Federal Reserve Bank President Janet Yellen said in a speech that policymakers must be ready for “substantial shocks” and that rising Treasury yields constitute a “disconcerting” signal of inflation fears, Bloomberg reports.

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