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World's Largest Bond Fund Calls Recession

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Top player lifts odds on global slump

By Tom Stevenson

(Filed: 17/08/2006)

The world's largest bond fund has raised its bet on a global slump next year, increasing its holdings in US Treasury bonds and government agency debt for the second month running. The move by Pimco's $93bn (£50bn) Total Return fund came as a raft of data from the US government and Opec pointed to a rapid slowdown in the American economy.
Scott Mather, head of portfolio management at Pimco's European arm, said:
"The US is leading the world economy to a lower level and possibly into recession. That's not our base case but we think the odds are now
greater than 30pc.
US Treasuries rose for a second day yesterday, pushing the benchmark 10-year bond's yield to its lowest since April, after reports showed slowing inflation and more cracks in the American housing market. The gloomy economic figures add weight to the growing conviction that the Federal Reserve's decision to leave interest rates on hold last week marked the end of a two-year tightening cycle.
Fixed-interest investments such as government bonds increase in value as yields fall so Pimco's increased exposure to US Treasuries will pay off if interest rates fall back from the 5.25pc they reached after 17 consecutive increases.
Mather said: "Normally it takes six months for the Fed to reverse policy after it stops. Nothing's different this time."
Earlier this week a survey of fund managers by
Merrill Lynch showed that almost half the institutional investors questioned believe stock markets will be lower in six months' time than today.
A clutch of technical analysts also turned bearish on equities this week, predicting a fall of up to 20pc in the main American indices, the S&P 500 and the Dow Jones Industrial Average.
HSBC yesterday added its voice to the bond bulls. Richard Cookson, a strategist, said: "We think that that is it for this cycle of rate hikes. While bonds do well when the Fed is cutting, they do even better from the end of the hiking cycle."

The inevitable turning of the business cycle that has never been beaten--even with a Miracle Economy which is looking more like a Con Economy.

We are lagging the US by about 6 months with our housing slump beginning to gain some momentum in the light of the recent government stats that show growth slowing.

The Bear is awake and is ready for its favourite breakfast--house prices! :D

When the economy turns junk bonds become too risky. Here is another early warning:


The Times August 17, 2006

Sharp rise in number of company bonds cut to junk status
By Patrick Hosking, Investment Editor
THE corporate bond market is heading for its worst year for credit quality in four years after a wave of recent downgrades to “junk” status.
Standard & Poor’s, the debt rating agency, warned investors of a sharp acceleration in the numbers of companies whose bonds are being relegated from investment grade to speculative grade or “junk”.

IMO, its time to lighten up on stocks, add some bonds and cash and think about Swiss Francs! Recession is around the corner.

Edited by Realistbear

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  • 301 Brexit, House prices and Summer 2020

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