Pimco Official Wary of Fed Buying Treasurys

A senior fund manager at bond fund giant Pacific Investment Management Co. said Tuesday that purchasing risky assets rather than Treasurys should be the top priority for the Federal Reserve.

Steve Rodosky, head of Treasury and derivatives trading at Newport Beach, Calif.-based Pimco, said he is “suspicious” about the argument that buying long-dated Treasury securities will help improve credit markets.

“The risk of buying Treasurys is that you would widen the yield spreads between Treasurys and risky assets,” said Rodosky in an interview.

That would run against the Fed’s stated intention of bringing down mortgage rates and corporate bond yields. Supporters of Fed purchases argued that yields on long-dated Treasurys are anchors for many types of fixed-rate corporate and consumer loans, including home loans.

But others, including Rodosky, counter that Treasury bond yields are already at very low levels. Purchases by the Fed would only serve to drive yields on government bonds even lower without having any impact on debt sold by the private sector as it wouldn’t change the concerns investors have about the economy’s outlook and the problems plaguing the banking sector

Rodosky said the Fed has other options to help keep rates low in the broader economy: The central bank could expand existing programs by increasing its purchases of mortgage-backed securities and agency debt.

Policymakers could also step in to relieve banks of their bad assets or even provide aid to the municipal bond market, said Rodosky. He supports the idea of setting up a “bad bank” to remove toxic assets from banks, though many issues need to be resolved.

Rodosky said a rebound in the economy in the second half of the year, as some have forecast, seems “pretty early” because there is still a lot of uncertainty, with much depending on the impact of the economic stimulus plan.

Rodosky said he continues to favor high-quality agency mortgage-backed securities and agency debt over U.S. Treasurys, as well as high-quality corporate bonds and bank debt insured by the Federal Deposit Insurance Corporation. â€"Min Zeng

Source:- WSJ.com