Viewpoints – April 2010 -PIMCO

Seems as mostly a re-hash from The Beach Boys, although NOT from their front-man. OUR TAKEAWAYS:

They continue to think like Citi – the group that believes in selling HERE VS buying ‘over there’ (10s/Bunds to 120bps – recall note we referred to earlier) and at times we’d agree. We’ve thought about it as one of our ‘right trades for the right reasons.’ At the moment we happen to DISAGREE but we digress:

At PIMCO, we continue to favor countries with the most stable debt dynamics: countries like Australia, Brazil, Canada and Germany. We do not expect a rising risk premium to destabilize these countries as much as we do in most of the rest of developed world. In contrast, we have lowered bond risk in countries with deteriorating debt dynamics, such as Japan, the U.K. and the U.S. We have also largely eliminated bond risk from countries with the most unstable debt dynamics, like Greece and rest of peripheral Europe.

They LIKE STEEPENING TRADES as well as front ends – including US:

There are opportunities to profit from central bank policy moves in this environment. We think markets have too aggressively priced in rate hikes in much of the world and there is room to potentially profit by overweighting short-dated bonds, which should recover in price as market expectations are not fulfilled. In particular, this strategy may work well in countries more likely to attempt to reflate their economies through much lower central bank policy rates and/or renewed quantitative easing. Both the U.K. and U.S. fit that description. But it is important to note this type of policy is not good for longer-dated bonds or the currencies of those countries. The low policy rate combined with a steep yield curve makes the total return potential of shorter-dated bonds greater than for other countries even while sovereign risks continue to rise in the U.K. and U.S. The end of the central bank asset purchase program in the U.K. and U.S. is another negative for longerdated bond exposure from those countries.

They do NOT like USD ?? thinking about ‘covert’ default potential via currency depreciaton? What happened to our thought about best lookin horse in the glue factory?? Seems they prefer emerging econ – BRICS – to US and Europe. Alrighty then.

In terms of currencies, we favor currencies of emerging economies that are midway through their secular journey of revaluation vs. the developed world. And we are underweighting currencies of the most fiscally challenged nations. In particular, an underweight is warranted in currencies of those countries most likely to perpetrate “covert” default through currency depreciation over a longer period of time (U.K., U.S.). The euro is also vulnerable because it remains fundamentally overvalued, is likely to offer very little carry yield in the years ahead, and is at risk of being reassessed as a less credible alternative to the U.S. dollar as tensions mount within the eurozone in the years ahead.

WE still like BUYING HERE vs SELLING OVER THERE – for the TRADE. That said, here is full 7pg note from PIMCO:

Viewpoints April 2010

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