Treasuries still strong: ML
Thursday, 19 February 2009 12:35pm
Investors with funds invested in US Treasuries should hang on to their investments for at least the next six months - despite some punters voicing fears that the sector might be next asset class in the US to implode, according to an industry expert.
Stephen Corry, Merrill Lynch, chief investment strategist for global wealth management, believes that the US Federal Reserve cannot allow Treasury yields to climb much higher than its current levels of around 2.6 per cent.
This is in stark contrast to some punters who believe Treasuries are now proving to be very expensive as investors piling into the sector drive yield rates to levels not seen in a long time.
"We're still very positive on Treasuries.
"We think that the US economy will grow at sub-trend over the next couple of years at least. And as a result that would probably lead to enhance the chances of deflation so we expect to see falling prices, typically like the one we had in Japan in the 1990s.
"While [Treasuries are] obviously not as good value as this time last year we still think there's potential upside," he said.
Meanwhile Anthony Michael, Aberdeen Asset Management head of fixed income - Asia, said investors should start to move away from government bonds because the yields won't be a high in the coming months.
"Going into cash or government backed bonds, is probably going to protect capital, but the problem is we think there's going to be a recovery in 2010 to 2011 and these government bond yields will move into only two or three per cent [yield]," he said.
"If you think about the next three years you're actually leaving yourself with a negative real return and you're not protecting yourself against inflation."
Instead financial planners should assess investment grade credit opportunities for their clients, he said.
"Depending on your timeframe and risk levels there are some enhanced cash products that are now yielding around eight per cent, most of the securities are investment grade and most are financials," he said.
"We're still in a uncertain environment so you still want to have a conservative approach to what you're doing but, historically, investment grade securities are as cheap as they've ever been."
Merrill Lynch's Corry said that in addition to Treasuries, the firm is also recommending other fixed income alternatives such as municipal bonds, agency debt and Federal Deposit Insurance Corp. backed bonds.
Ruth Liew and Michael Hobbs
