U.S. Stock Futures Advance; DJIA May Rebound

By Shani Raja and Adria Cimino - Sep 26, 2011 6:39 PM GMT+0700

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Sept. 26 (Bloomberg) -- Paul Hickey, co-founder of Bespoke Investment Group, talks about the outlook for U.S. markets, commodities, and Europe's debt crisis. Hickey speaks with Deirdre Bolton and Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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Sept. 26 (Bloomberg) -- Eswar Prasad, a professor at Cornell University and a former head of the International Monetary Fund’s financial studies division, talks about the outlook for the global economy. Euro-area countries will do whatever is necessary to end the crisis and ensure the financial stability of the entire euro area and its members, the IMF said in a statement after its meetings in Washington on Sept. 24. Prasad speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

U.S. stock futures rallied, indicating the Dow Jones Industrial Average may rebound from the biggest weekly decline since October 2008, as investors weighed policy makers’ response to Europe’s debt crisis.

General Electric Co., the world’s biggest maker of jet engines, and Alcoa Inc., the largest U.S. aluminum maker, increased at least 1.4 percent in early New York trading. Bank of America Corp. and JPMorgan Chase & Co. climbed more than 2.5 percent to pace an advance in banks.

Standard & Poor’s 500 Index futures expiring in December climbed 1.6 percent to 1,148 at 7:38 a.m. in New York after earlier falling as much as 1.3 percent. Dow average futures advanced 137 points, or 1.3 percent, to 10,834.

Finance ministers and central bankers urged European officials to intensify efforts to contain their 18-month debt crisis as Greece teetered on the edge of default. Bank of Canada Governor Mark Carney estimated 1 trillion euros ($1.3 trillion) may have to be deployed. U.K. Chancellor of the Exchequer George Osborne said a solution is needed by the time Group of 20 leaders meet in Cannes, France, on Nov. 3-4.

“The market is already pricing in a Greek default,” Jack Ablin, who helps oversee $55 billion as chief investment officer for Chicago-based Harris Private Bank, said in a telephone interview. “If we don’t see any chips falling, investors will be pleased. This market is starting to get cheap.”

‘Strongly Support’

The International Monetary Fund said it is ready to “strongly support” European nations in their efforts to resolve the region’s sovereign debt crisis. Euro-area countries will do whatever is necessary to end the crisis, the fund said in a statement after its meetings in Washington on Sept. 24. European Central Bank policy makers are likely to next week debate restarting their covered-bond purchases along with further measures to ease monetary conditions, a euro-region central bank official said.

The Dow last week sank 6.4 percent, its biggest loss in almost three years, as the Federal Reserve said risks to the U.S. economy had increased and Europe’s debt crisis went unresolved.

The Morgan Stanley Cyclical Index of companies most-tied to economic growth lost 11 percent last week as all 30 of its stocks retreated. The Dow Jones Transportation Average, also considered a proxy for the economy, slumped 9.6 percent. Both gauges fell the most since March 2009.

GE rose 1.4 percent to $15.43 in pre-market trading. Alcoa added 2.5 percent to $10.32. JPMorgan climbed 2.7 percent to $30.38 and Bank of America increased 3.3 percent to $6.52.

Purchases of new houses in the U.S. probably declined in August to the lowest level in six months as buyers sought cheaper distressed properties, economists said before a report today. Sales fell 1.3 percent, a fourth consecutive drop, to a 294,000 annual pace, according to the median estimate in a Bloomberg News survey of 59 economists.

$1 Trillion Erased

Last week’s rout erased $1 trillion from U.S. equities amid concern Greek insolvency is inevitable and Europe can’t contain the damage. The S&P 500 slumped 17 percent between April 29 and Sept. 23. The index’s gain since March 2009, when the last bear market ended, has been cut to 68 percent. The benchmark gauge for American common equity is trading at 12.4 times earnings in the past 12 months, 4.4 percent below its average valuation at the lowest point during the last nine bear markets, according to data compiled by Bloomberg.

Stocks are having the worst quarter on record relative to U.S. Treasuries and gold, which may force investors to buy equities to rebalance their allocations, JPMorgan Chase & Co.’s Marko Kolanovic said. U.S. and emerging-market equities have returned 43 percentage points less, the most during a quarter since at least 2002, according to data compiled by Kolanovic, whose analysis is based on a model portfolio composed of stocks, bonds and gold.

“This underperformance may trigger significant quarterly rebalance flows into equities and out of Treasuries at the end of next week,” Kolanovic, the New York-based global head of equity derivatives strategy at JPMorgan, wrote in a note to clients last week.

To contact the reporters on this story: Shani Raja in Sydney at sraja4@bloomberg.net; Adria Cimino in Paris at acimino1@bloomberg.net

To contact the editors responsible for this story: Andrew Rummer at arummer@bloomberg.net; Nick Gentle at ngentle2@bloomberg.net

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Commodities Drop to 10-Month Low as Silver Plummets on Debt, Growth Risk

By Chanyaporn Chanjaroen - Sep 26, 2011 3:39 PM GMT+0700
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Silver for immediate delivery slumped 12 percent to $27.3475 an ounce. Photographer: Carla Gottgens/Bloomberg

Commodities fell to their lowest in almost 10 months and silver tumbled below $28 for the first time since February on speculation Europe’s debt crisis will worsen, curbing raw-material demand. Copper plunged below $7,000 a ton for the first time in more than a year.

The Standard & Poor’s GSCI Spot Index shed 1.1 percent to 592.5 by 9:28 a.m. in London after slumping as much as 2.6 percent to the lowest since Dec. 1. The gauge slumped 8.3 percent last week, the worst performance since May. Cash silver plunged as much as 16.3 percent to its lowest level since November. Copper slumped as much as 7.6 percent, a seventh day of declines and the worst losing streak since December 2008.

European policy makers are facing mounting pressure to step up efforts to prevent their sovereign-debt crisis from further roiling the world’s financial markets and economy. Pacific Investment Management Co., which runs the world’s biggest bond fund, is forecasting that advanced economies will stall over the next year as Europe slides into a recession.

“The state of the global economy that we are seeing now is worse than what we had three to six months ago,” Dominic Schnider, global head of commodity research for UBS AG’s wealth- management unit, said today by phone in Singapore. He predicted benchmark commodity indexes will drop a further 10 to 15 percent from now.

The S&P GSCI Spot Index ended last week down 21 percent from the almost three-year high in April, meeting the common definition of a bear market. The last time the index fell that much was in 2008 when the global economy sank into its worst slump since World War II.

Money Managers

Money managers cut the combined net-long position across 18 futures and options by 20 percent in the week ended Sept. 20, the most since February 2010, data from the U.S. Commodity Futures Trading Commission show.

Silver for immediate delivery slumped 6.2 percent to $29.225 an ounce, after earlier today touching $26.07. Cash gold fell 3.2 percent to $1,604.43, more than $300 below its record $1,921.15 an ounce on Sept. 6, after earlier today touching $1,532.72, the lowest level since July.

Morgan Stanley attributed silver’s drop to growing concerns about industrial usage and the “high retail component of the investor base,” analysts led by Hussein Allidina wrote in a report. “The reversal in gold provides an attractive entry point for our preferred metal.”

Three-month delivery copper fell 4 percent to $7,067 a ton, taking this year’s loss to 26 percent, after earlier today touching $6,800, the lowest level in more than a year. The contract lost 15 percent last week.

“Copper is clearly in a downward trend as investors see no improvement in the macro environment, only deterioration,” Zhang Zhenghua, an analyst at Minmetals Futures Co., said today by phone from Shanghai.

Crude oil for November slid 1.5 percent at $78.65 a barrel on the New York Mercantile Exchange.

To contact the reporter on this story: Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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UBS in ‘Disarray’ as Gruebel Quits

By Giles Broom - Sep 26, 2011 2:36 PM GMT+0700
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Pedestrians pass the UBS AG headquarters in Zurich, Switzerland. Photographer: Peter Frommenwiler/Bloomberg

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Morale within the investment-banking division, already depressed following the trading scandal, dropped even further in the wake of Gruebel’s departure. Photographer: Simon Dawson/Bloomberg

The exit of Chief Executive Officer Oswald Gruebel heightened the turmoil roiling UBS AG since it announced a $2.3 billion loss from unauthorized trading less than two weeks ago.

Gruebel, the head of Switzerland’s largest bank since February 2009, was replaced on an interim basis by Sergio Ermotti, who joined less than six months ago as CEO for Europe, the Middle East and Africa, UBS said on Sept. 24. The resignation of Gruebel, 67, who restored the Zurich-based bank to profit after record losses, marks the third CEO departure since 2007.

“This is a bank now in disarray,” said Christopher Wheeler, an analyst at Mediobanca Securities SpA in London, which today cut its rating on UBS to “underperform” from “outperform.” “The board made a terrible blunder” by not persuading Gruebel to stay, he said.

Morale within the investment-banking division, already depressed following the trading scandal, dropped even further in the wake of Gruebel’s departure, according to an executive at the unit who requested anonymity because he wasn’t authorized to speak publicly.

As the fallout from the trading scandal widens, a senior executive at UBS speculated that Gruebel quit to prevent the greater disruption that might have resulted from the departure of investment-banking chief Carsten Kengeter, who’s in the midst of shrinking the division. Kengeter, 44, is viewed by some at UBS as a favorite of Chairman Kaspar Villiger. Villiger told reporters after Gruebel’s departure that Kengeter had done an “excellent job” in covering positions after the loss and that there was no doubt about his future.

Gruebel ‘Shocked’

Gruebel, in a memo to staff, said he was convinced a change of leadership at the top was in the best interests of UBS. He resigned as the board grappled with the aftermath of the trading loss in Singapore, where members and executives convened for a meeting scheduled to coincide with the bank’s sponsorship of the Singapore Formula One Grand Prix.

“That it was possible for one of our traders in London to inflict a multibillion loss on our bank through unauthorized trading shocked me,” said Gruebel, a former trader whose career in finance spanned half a century. The scandal dealt a “significant setback” to UBS’s efforts to rebuild trust, he said in the memo.

Gruebel, who joined UBS after about 37 years at rival Credit Suisse Group AG, is the only person to have served as CEO of both of the biggest Swiss banks. Brought out of retirement to rebuild UBS after record losses, he returned the bank to profit about six months after arriving, resolved a dispute with the U.S. over banking secrecy that threatened the firm’s existence and stemmed nine straight quarters of client defections at the private bank.

More Departures?

Two senior UBS executives speculated on whether other departures might follow, such as Kengeter, Maureen Miskovic, 54, who took over as chief risk officer in January, and Thomas Daula, the chief operating officer at the investment bank. Miskovic previously served as chief risk officer at State Street Corp. and held the same role at Lehman Brothers Holdings Inc. for six years until 2002.

Daula, hired in June 2008 to run risk management at the investment bank, had been chief risk officer at Morgan Stanley in 2007 when that bank wrote down $9.4 billion on wrong-way proprietary trading bets on mortgage-related securities. He became COO at UBS’s investment bank in January.

Less Complex

Gruebel and Kengeter, 44, tried for the last two years to rebuild UBS into a top-tier investment bank, hiring more than 1,700 people and bringing in new business heads to replace those that left or were fired. They also increased risk-taking. Market turmoil and rising capital requirements led them to begin reversing that strategy even before the trading loss. The retrenchment is likely to accelerate now.

“In the future, the investment bank will be less complex, carry less risk and use less capital to produce reliable returns and contribute more optimally to UBS’s overall objectives.” Villiger, 70, told reporters two days ago.

UBS will probably scale back credit businesses that haven’t been very profitable and that will be affected most by the higher capital requirements under Basel III, said Cormac Leech, an analyst at Canaccord Genuity Ltd. in London who has a “hold” rating on UBS stock. The equities business, by contrast, “has a relatively high return so you’d expect them not to close that down,” Leech said.

UBS will announce further changes to the investment bank in a presentation to investors scheduled for Nov. 17, Ermotti said on a conference call with reporters two days ago.

Changing Aspirations

“They’ve got to change the aspirations of the investment bank and they’ve got to shrink it,” said Peter Thorne, a London-based analyst at Helvea SA.

UBS said it may be unprofitable in the third quarter after the unauthorized trading. The loss, less than two months after Gruebel said the firm had “one of the best” risk-management units in the industry, raised questions about the bank’s controls.

It resulted from trading in Standard & Poor’s 500, DAX and EuroStoxx index futures over the past three months, UBS said on Sept. 18. While the positions were taken within the “normal business flow of a large global equity trading house,” the size of the risk was hidden by phony trades, UBS said at the time.

Kweku Adoboli, 31, the UBS trader charged with fraud and false accounting that may have resulted in the loss, remained in custody after a hearing in London on Sept. 22. He has yet to enter a plea.

‘In a Vacuum’

The shares fell as much as 2.9 percent in Zurich trading today and were up 1.2 percent at 10.24 francs as of 9:34 a.m. The stock has declined by 6.1 percent in Swiss trading since the trading loss was announced and 33 percent this year. That compares with a 36 percent tumble in the Bloomberg Europe Banks and Financial Services Index, which tracks 46 companies.

Gruebel’s decision to leave throws into relief the lack of a succession plan at UBS, analysts said. Villiger is scheduled to step down in 2013 and be replaced as chairman by former Bundesbank President Axel Weber, 54, who lacks hands-on experience running a commercial bank. The trading loss also reduces the chance Kengeter will ascend to the top job.

Villiger, on the conference call with reporters on Sept. 24, said the board tried unsuccessfully to persuade Gruebel to remain until the annual shareholders meeting. He will be paid for a six-month notice period and have no further role at the bank. His sudden departure suggests a worrying level of disorder, especially as Chief Financial Officer Tom Naratil took up his post only three months ago, said Mediobanca’s Wheeler.

“They’ve left themselves in a vacuum,” Wheeler said. “It’s got a brand new CFO and now they’ve let the CEO walk away.”

Ermotti in Charge

Ermotti, a 51-year-old Swiss national who joined UBS in April after working at Merrill Lynch & Co. and UniCredit SpA, will be interim CEO while the board seeks a permanent successor to Gruebel, the bank said. In his 18 years at Merrill Lynch, Ermotti oversaw businesses including the global equities division before leaving in 2003 to join UniCredit, Italy’s biggest bank.

As UniCredit’s investment-banking chief, Ermotti also supervised global transaction and private banking. Ermotti had aimed to compete with the world’s top securities firms as mergers soared and business flourished before the subprime crisis spread and credit became scarce. He later scaled back the plan to focus on corporate and investment-banking business in UniCredit’s home markets.

To contact the reporter on this story: Giles Broom in Geneva at gbroom@bloomberg.net

To contact the editor responsible for this story: Frank Connelly in Paris at fconnelly@bloomberg.net

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Bankers Splinter on Remedy for European Debt as Tension Pervades Meeting

By Christine Harper, Dawn Kopecki and Simon Kennedy - Sep 26, 2011 9:03 AM GMT+0700
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Attendees watch Christine Lagarde, managing director of the International Monetary Fund (IMF), speak during a news briefing on a television monitor at the IMF and World Bank annual fall meeting in Washington, D.C., U.S., on Saturday, Sept. 24, 2011. Photographer: Joshua Roberts/Bloomberg

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Timothy F. Geithner, U.S. Treasury secretary, urged governments to unite with the European Central Bank to increase the firepower of the fund, known as the European Financial Stability Facility. Photographer: Peter Foley/Bloomberg

Wall Street leaders, urging coordinated action from world governments to solve the European sovereign-debt crisis, struggled themselves during four days of meetings in Washington to agree on what’s needed to end it.

The chiefs of firms including JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS), Deutsche Bank AG (DBK) and Societe Generale (GLE) SA met for three hours at the National Archives on Sept. 23. They differed on which government and private solutions may restore confidence in European debt and banks, and on some elements of regulation, said two participants who spoke on condition of anonymity because the meeting wasn’t public.

“It was a big group there, they’re going to differ about stuff; there’s a lot of tension in the air because of the world we live in,” Morgan Stanley (MS) Chief Executive Officer James Gorman, 53, said as he left the event, which coincided with weekend meetings of the International Monetary Fund and Institute of International Finance. “There’s no one solution. It’s going to be 25 different things.”

Bank-stock indexes in Europe and the U.S. have dropped more than 30 percent this year and borrowing costs for European lenders have climbed amid concern that Greece and other European countries may default. The level of disagreement between bankers and government officials who gathered for the annual IMF meeting was matched only by their shared sense that the stakes have rarely been higher.

‘More Gravity’

“There’s not been a prior meeting at which matters have had more gravity and at which I’ve been more concerned about the future of the global economy,” said Lawrence Summers, a former U.S. Treasury secretary and White House economic adviser, who said it was his 20th annual IMF meeting.

Asian stocks fell today amid concern the European debt crisis may weaken economic growth. The MSCI Asia Pacific Index slid 1.2 percent to 110.38 at 11 a.m. in Tokyo, set for its lowest close since June 2010.

Discussion of European governments’ options, including how to use their 440 billion-euro ($596 billion) rescue fund, dominated the policy meetings. Most European parliaments, including Germany’s, still haven’t voted on a July 21 plan to endow the fund with more powers, including the ability to buy bonds and inject money into banks.

Geithner’s Plea

U.S. Treasury Secretary Timothy F. Geithner urged governments to unite with the European Central Bank to increase the firepower of the fund, known as the European Financial Stability Facility.

Failure to act carries the “threat of cascading default, bank runs and catastrophic risk,” Geithner said in a Sept. 24 statement to the IMF, his strongest public lobbying yet. Bank of Canada Governor Mark Carney said 1 trillion euros may be needed and U.K. Chancellor of the Exchequer George Osborne set a Nov. 3-4 Group of 20 summit as the deadline for a solution.

European policy makers indicated they may use leverage, or borrowed money, to increase the spending strength of the EFSF. Klaus Regling, its CEO, and German Finance Minister Wolfgang Schaeuble downplayed speculation that the fund might borrow from the European Central Bank or provide insurance on loans provided by the ECB directly to the private sector.

Finance officials this week will also discuss accelerating the establishment of a permanent rescue to July 2012, a year earlier than planned, according to a document prepared for the meetings and obtained by Bloomberg News. ECB Governing Council members Ewald Nowotny and Luc Coene said in interviews in Washington that the bank may step up its own response next week.

Bankers Mingle

The Institute of International Finance, an organization of more than 400 financial companies worldwide, holds its annual meetings in parallel with the IMF’s. In normal times, the private-sector bankers use the weekend to mingle with one another, and with government ministers and central bankers, trying to win business and get policy insight.

In some ways, this time was no different as bankers hunkered down in hotels around Washington for meetings with government clients and executives of other banks. JPMorgan and Citigroup Inc. (C), both based in New York, held cocktail parties. Even UBS AG (UBSN) feted guests with champagne and dance music on Sept. 24, the same day CEO Oswald Gruebel, 67, resigned following the bank’s announcement that it lost $2.3 billion on what it said were “unauthorized” trades.

Compares With 1930s

Yet in private discussions, bankers said the environment was exceptional. A senior European banker said he sees policy makers’ decisions as being as momentous as those in the 1930s. A senior U.S. bank executive said he’s more worried than he was at any point during the financial crisis of 2008 and 2009.

About 1,000 people attended a Sept. 24 IIF dinner, which featured a tribute to ECB President Jean-Claude Trichet, who’s stepping down Oct. 31 and will be succeeded by Mario Draghi, the governor of Italy’s central bank.

Guests dined on beef tenderloin stuffed with red chard, dates and pine nuts, and truffled potato crepes. They heard speeches about Trichet’s career and accomplishments from IIF Chairman Josef Ackermann, who’s also CEO of Frankfurt-based Deutsche Bank, as well as former Federal Reserve Chairman Paul Volcker and Carney, the Bank of Canada governor.

The ECB’s policies in recent years, such as buying bonds issued by weaker European nations and providing cash loans in return for banks’ bond holdings, have helped provide support for both governments and lenders. The policies also have stirred discontent as two German members of the ECB’s governing council resigned this year amid signs of growing disagreement about the central bank’s efforts.

ECB Easing

IIF Chief Economist Philip Suttle told conference attendees on Sept. 24 that solving the European crisis will require the ECB to reduce interest rates to boost growth.

“You need the ECB to ease significantly, and that probably means the euro needs to come down,” Suttle said.

Schaeuble, the German finance minister, addressed the same room hours later with a contrasting message: “We won’t come to grips with economies deleveraging by having governments and central banks throwing -- literally -- even more money at the problem,” he said.

At a panel discussion yesterday titled “Systemic Stability and Global Financial Firms,” bank executives including Goldman Sachs President Gary D. Cohn and Barclays Plc (BARC) CEO Robert E. Diamond, 60, discussed risk management and regulation without addressing the European crisis directly.

Restore Confidence

After the discussion, Cohn was asked what he thinks European leaders must do to restore investor confidence.

“The market needs to hear that they understand the depth and breadth of the problem,” said Cohn, 51. “They just need to convey to them that what they’re doing is big enough and powerful enough to get the market’s attention.”

Modeling a European rescue after the U.S. Treasury Department’s Troubled Asset Relief Program, which started injecting capital into banks in 2008, “would be a good solution,” he said.

Frederic Janbon, global head of fixed income at Paris-based BNP Paribas (BNP) SA, said he hopes policy makers stick with implementing the plan agreed to on July 21.

“Before we go to what we do after, we start by doing what we promised before,” he said in an interview.

Deutsche Bank’s Ackermann urged European nations to approve the 440 billion-euro rescue fund and to implement a bailout plan for Greece that are part of an agreement reached on July 21.

‘Seal the Deal’

“Our strong advice is to move on and seal the deal which was agreed on in Brussels at the end of July,” Ackermann, 63, said during a press conference yesterday. “To re-open that debate would not be productive and definitely not stabilize the turbulent situation we’re in.

JPMorgan Chief Economist Bruce Kasman, speaking a day earlier, said the July 21 bailout plan for Greece isn’t going to be enough to contain the crisis.

“Greece is insolvent and the European Monetary Union, the European Union as a whole, needs to deal with that,” Kasman said at a Sept. 24 panel discussion hosted by the IIF. “It hasn’t yet come to terms with that.”

At the private gathering of bank CEOs on Sept. 23, which was the first joint meeting of the IIF and the Financial Services Forum, the executives spent part of the session getting Carney’s views on the regulatory outlook. JPMorgan CEO Jamie Dimon, 55, criticized regulators’ plans to require the biggest banks to hold extra capital and got into a dispute with Carney, said three people with knowledge of the encounter.

Joseph Evangelisti, a spokesman for JPMorgan, and Jeremy Harrison, a spokesman for the Bank of Canada, declined to comment on what was said at the meeting.

“More generally, we have been engaged in constructive dialogue with a range of stakeholders, both domestic and international, as we move forward through this financial-sector reform process,” Harrison said in an e-mailed statement.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net Dawn Kopecki in New York at dkopecki@bloomberg.net Simon Kennedy in Washington at skennedy4@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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U.S. Stock Futures, Oil Rise From Six-Week Low

By Stephen Kirkland - Sep 26, 2011 6:22 PM GMT+0700
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BNP Paribas SA, UniCredit SpA and Deutsche Bank AG, the biggest lenders in France, Italy and Germany respectively, rose more than 4 percent. Photographer: Chris Ratcliffe/Bloomberg

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Sept. 26 (Bloomberg) -- Khiem Do, head of multi-asset strategy at Baring Asset Management in Hong Kong, talks about financial market volatility and the outlook for the global economy. Do speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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Sept. 26 (Bloomberg) -- Paul Hickey, co-founder of Bespoke Investment Group, talks about the outlook for U.S. markets, commodities, and Europe's debt crisis. Hickey speaks with Deirdre Bolton and Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

European stocks and U.S. index futures rose, reversing earlier declines, while the euro pared losses as finance chiefs including U.S. Treasury Secretary Timothy F. Geithner urged more efforts to solve the debt crisis. Copper, gold and silver led commodities lower.

The Stoxx Europe 600 Index advanced 2.8 percent at 7:20 a.m. in New York, after slipping 1.4 percent. Standard & Poor’s 500 Index futures climbed 1.8 percent. The euro depreciated 0.2 percent against the yen, and the Dollar Index lost 0.6 percent. The yield on the 10-year Treasury bond rose two basis points. The Greek two-year yield jumped 166 basis points. Copper dropped for a seventh day, while oil rebounded.

Geithner told the annual meeting of the International Monetary Fund that failure to combat the Greek-led turmoil threatens “cascading default, bank runs and catastrophic risk.” Bank of Canada Governor Mark Carney estimated 1 trillion euros ($1.3 trillion) may be needed, while German Chancellor Angela Merkel’s comments that euro-region leaders must erect a firewall around Greece prompted speculation about a European version of the U.S.’s Troubled Asset Relief Program.

“Nothing concrete has come out of the IMF meeting, but there is a lot of talk about the Europe TARP and rate cuts so that has led to optimism in some quarters,” said Ioan Smith, a director at Knight Capital Europe Ltd. in London. “I still think there is a long way to go. Nobody wants to be too long this market.”

More than six stocks gained for every one that fell in the Stoxx 600, which dropped 6.1 percent last week. BNP Paribas SA, UniCredit SpA and Deutsche Bank AG, the biggest lenders in France, Italy and Germany respectively, rose more than 6 percent.

Bank Capital

The European Central Bank is likely to debate restarting covered-bond purchases and more measures to ease monetary conditions next week, a euro-region central bank official said. Reintroduction of 12-month loans to banks will also be discussed at the ECB’s Oct. 6 policy meeting, said the person, who spoke on condition of anonymity because the information is confidential. Interest-rate cuts are likely to be discussed, though they are not on the current agenda, the official said.

ECB Governing Council member Ewald Nowotny said he cannot exclude that the bank will lower its benchmark interest rate, Market News International reported. French banks have enough capital to withstand possible losses from Greece-related risks, Journal du Dimanche yesterday cited Bank of France Governor Christian Noyer as saying.

The advance in S&P 500 futures indicated the benchmark gauge will rise for a second day.

Home Sales

A Commerce Department report due at 10 a.m. in Washington may show purchases of new houses in the U.S. declined in August to the lowest level in six months as buyers sought cheaper distressed properties, according to the median estimate in a Bloomberg News survey of 59 economists.

The euro slid against 10 of its 16 major counterparts. New Zealand’s dollar fell 0.6 percent versus its U.S. counterpart, sliding for the sixth straight day in the longest run of declines since September 2008, after the country’s trade deficit was wider than economists estimated.

The yield on the Greek 10-year bond rose 35 basis points, driving the difference in yield with benchmark German bunds 31 basis points higher to 22.2 percentage points.

Default Risk

The cost of insuring French, German and Belgian debt rose to records, before trading lower. Credit-default swaps on German debt climbed 2.5 basis points to a record 111, contracts on France rose seven basis points to an all-time high of 204 and Belgium was six basis points higher at 301, also the highest ever, CMA prices show.

Oil in New York rose 0.8 percent to $89.47 a barrel, after falling as much as 3.4 percent. Silver dropped 9.6 percent, bringing its decline to 29 percent over four days. Copper fell 1.9 percent.

The MSCI Emerging Markets Index fell 0.8 percent. Thailand’s SET Index tumbled 5.7 percent after the central bank said it may cut its economic growth forecasts. The won and the rupiah each depreciated by at least 2 percent versus the dollar.

Russia’s Micex Index rose 3.4 percent after Prime Minister Vladimir Putin said he would run again for president next year.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Shiyin Chen in Singapore at schen37@bloomberg.net

To contact the editor responsible for this story: Stuart Wallace at swallace6@bloomberg.net

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European Stocks Climb as Banks, Insurers Rally; U.S. Futures Pare Losses

By Sarah Jones - Sep 26, 2011 5:21 PM GMT+0700
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A trader speaks in front of a display for the DAX index at the Frankfurt Stock Exchange in Frankfurt, Germany. Photographer: Wolfgang von Brauchitsch/Bloomberg

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Sept. 26 (Bloomberg) -- Paul Hickey, co-founder of Bespoke Investment Group, talks about the outlook for U.S. markets, commodities, and Europe's debt crisis. Hickey speaks with Deirdre Bolton and Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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Sept. 26 (Bloomberg) -- Bob Parker, senior adviser at Credit Suisse Asset Management, talks about investment strategy as European policymakers struggle to contain the region’s debt crisis. He speaks with Owen Thomas on Bloomberg Television's "Countdown." (Source: Bloomberg)

European stocks gained, erasing earlier losses, as finance ministers and central bankers urged policy makers in Europe to intensify efforts to contain the region’s debt crisis. U.S. futures rose while Asian shares fell.

BNP Paribas SA led a rebound in banks amid speculation the European Central Bank may cut interest rates next month. Dexia SA jumped 7.6 percent amid report the lender is ready to sell 20 billion euros ($27 billion) of bond assets and that a split of the bank is under consideration.

The benchmark Stoxx Europe 600 Index rallied 1.8 percent to 220.13 at 11:20 a.m. in London, rebounding from an earlier loss of 1.4 percent. Modeling a European financial rescue after the U.S. Treasury Department’s Troubled Asset Relief Program, which started injecting capital into banks in 2008, “would be a good solution,” Goldman Sachs Group Inc. President Gary D. Cohn said at a panel discussion with other bank executives yesterday. The debate coincided with a weekend meeting of the International Monetary Fund.

“Nothing concrete has come out of the IMF meeting, but there is a lot of talk about the Europe TARP and rate cuts so that has led to optimism in some quarters,” said Ioan Smith, a director at Knight Capital Europe Ltd. in London. “I still think there is a long way to go. Nobody wants to be too long this market.”

U.S., Asian Shares

Futures on the Standard & Poor’s 500 Index gained 0.8 percent today, while the MSCI Asia Pacific Index sank 2.4 percent to the lowest since May 2010.

U.S. Treasury Secretary Timothy F. Geithner warned at the annual meeting of the IMF failure to combat the Greek-led turmoil threatened “cascading default, bank runs and catastrophic risk.”

German Chancellor Angela Merkel said euro-region leaders must erect a firewall around Greece to avert a cascade of market attacks on other European states that would risk breaking up the currency area.

Expanding the powers of the region’s rescue fund, the European Financial Stability Facility, as agreed by European leaders in July is necessary to avoid Greece’s problems from spilling over to other countries, Merkel said late yesterday on ARD television. The fund’s permanent successor, due to take effect in mid-2013, is needed “so we can in fact let a state go insolvent” if it can’t pay its bills, she said.

EFSF Debate

Policy makers can make the EFSF more “efficient” by leveraging it without involving the ECB, German Finance Minister Wolfgang Schaeuble said over the weekend. He also raised the prospect of bringing in the permanent backstop before 2013.

Bank of Canada Governor Mark Carney estimated 1 trillion euros ($1.3 trillion) may have to be deployed while U.K. Chancellor of the Exchequer George Osborne said a solution is needed by the time that Group of 20 leaders meet in Cannes, France, on Nov. 3-4.

More than $3.5 trillion was wiped from equity values last week, driving the MSCI All-Country World Index of 45 nations into a bear market as speculation grew that policy makers are struggling to contain a debt crisis that has engulfed Europe and has Greece teetering on the edge of a default.

The benchmark Stoxx Europe 600 Index has tumbled 26 percent from this year’s high on Feb. 17, leaving the gauge trading at about 9 times the estimated earnings of its companies, near the lowest valuation since March 2009, Bloomberg Data shows.

BNP Climbs

BNP Paribas, France’s biggest bank, rallied 8 percent to 27.34 euros. Intesa Sanpaolo SpA climbed 8.2 percent to 1.09 euros in Milan and Commerzbank AG advanced 7.6 percent to 1.76 euros in Frankfurt.

BofA Merrill Lynch said in a report to clients that the ECB may lower interest rates by 50 basis points at its next meeting on Oct. 6 instead of November or early 2012 following meetings with the IMF. ECB Governing Council member Ewald Nowotny said in an interview with Market News International that he cannot exclude that the bank will lower its benchmark interest rate, while Yves Mersch said speculation about a 50 basis-point interest-rate cut is unfounded.

Dexia surged 7.6 percent to 1.41 euros after Les Echos reported the lender is ready to sell 20 billion euros of bond assets to continue as a viable business. The newspaper cited an unidentified person close to the matter.

The bank yesterday denied reports in the French press that a split of the bank is under consideration. Le Figaro said that Dexia shareholders La Banque Postale and state-owned Caisse des Depots et Consignations are working to form a new lender to French municipalities, with Dexia as an investor.

Dexia Tie Up

“The long-running rumour of a tie-up between Dexia and CDC and La Banque Postale to create a joint venture for the financing of local authorities has re-emerged as concerns over the solvency and liquidity of banks, notably French banks, have grown,” Alex Koagne, an analyst at Natixis, wrote today.

Kloeckner & Co. SE fell 5.7 percent to 9.07 euros. The German steel trader is expecting a weak third quarter due to lower orders and isn’t likely to reach its earning goals for 2011, Deutsches Anleger Fernsehen reported, citing Chief Executive Officer Gisbert Ruehl in an interview.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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Pimco Forecasts Europe Recession Next Year

By Simon Kennedy, Rich Miller and Gabi Thesing - Sep 26, 2011 2:45 PM GMT+0700
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A pedestrian walks past a store due to close down in Walsall, U.K. Photographer: Chris Ratcliffe/Bloomberg

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Sept. 26 (Bloomberg) -- Louise Cooper, an analyst at BGC Partners, discusses efforts by euro-zone leaders to stem the sovereign debt crisis. She talks with Owen Thomas on Bloomberg Television's "On the Move." (Source: Bloomberg)

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Sept. 26 (Bloomberg) -- Bob Parker, senior adviser at Credit Suisse Asset Management, talks about investment strategy as European policymakers struggle to contain the region’s debt crisis. He speaks with Owen Thomas on Bloomberg Television's "Countdown." (Source: Bloomberg)

Pacific Investment Management Co., which runs the world’s biggest bond fund, is forecasting that advanced economies will stall over the next year as Europe slides into a recession, underscoring mounting investor concern about the global economic outlook.

There will be little-to-no economic growth in industrial nations in the coming 12 months as Europe’s economy shrinks by 1 percent to 2 percent and the U.S. stagnates, said Mohamed El- Erian, chief executive officer of Newport Beach, California- based Pimco. That will leave worldwide expansion at about 2.5 percent, less than the 4 percent forecast by the International Monetary Fund this year and next.

Such gloomy sentiment dominated weekend talks of policy makers, investors and bankers in Washington, where the IMF and World Bank held their annual meetings. The Dow Jones Industrial Average suffered its biggest loss since 2008 last week as the Federal Reserve said risks to the U.S. economy had increased and Europe’s debt crisis went unresolved.

“For the next 12 months, the global economy will slow materially with advanced economies struggling to grow much above zero,” El-Erian said in a Sept. 24 interview in Washington. “Emerging economies will maintain faster growth, albeit not as high as the last 12 months.”

Worst Experience

Former U.S. Treasury Secretary Lawrence Summers said he has been to 20 years of IMF gatherings, and “there’s not been a prior meeting at which matters have had more gravity and at which I’ve been more concerned about the future of the global economy.”

The euro dropped, stocks retreated and Treasuries advanced. The European currency fell 0.5 percent to $1.3432 as of 8:37 a.m. in London, the MSCI Asia Pacific index of equities was down 2.6 percent and yields on benchmark 10-year U.S. notes declined 2 basis points to 1.82 percent. In Europe, the Stoxx 600 index rose 0.6 percent.

Finance ministers and central bankers urged European officials to intensify efforts to contain their 18-month debt crisis as Greece teetered on the edge of default. U.S. Treasury Secretary Timothy F. Geithner called on governments to unite with the European Central Bank to beef-up the capacity of their 440 billion-euro ($594 billion) bailout fund, warning that failure to act threatened “cascading default, bank runs and catastrophic risk.”

Trillion Euros

Bank of Canada Governor Mark Carney estimated 1 trillion euros may have to be deployed. U.K. Chancellor of the Exchequer George Osborne said a solution is needed by the time that Group of 20 leaders meet in Cannes, France, on Nov. 3-4.

“Patience is running out in the international community,” Osborne said. “The euro zone has six weeks to resolve this political crisis.”

Whether “the markets will accept the luxury of six weeks grace remains to be seen,” said Jim O’Neill, chairman of Goldman Sachs Asset Management in London. “In the interim, policy makers will have to feed markets with hope as to what might arrive in November and then not disappoint.”

Reports this week may reinforce the sense of weakness, with economists predicting that U.S. consumer spending slowed in August and business confidence in Germany, Europe’s largest economy, fell to a 15-month low this month.

Memphis, Tennessee-based FedEx Corp., operator of the world’s biggest cargo airline, cut its full-year profit forecast last week amid declining demand in the U.S. and Asia. CEO Fred Smith nevertheless said he expects sluggish economic growth rather than a recession.

Soros’s Call

Billionaire investor George Soros said “something needs to be done” to safeguard Europe’s banks because Greece may be unable to avoid default. The IMF said last week that the turmoil has generated as much as 300 billion euros in credit risk for the region’s banks and advocated capital injections.

German Chancellor Angela Merkel said euro-region leaders must erect a firewall around Greece to avert a cascade of market attacks on other European states that would risk breaking up the currency area. “We have to be in a position to react,” Merkel said late yesterday on ARD television. “We have to be able to put up a barrier.”

European policy makers hinted they may soon heed Geithner’s advice and use leverage to increase the firepower of their rescue fund, while saying parliaments must first ratify a July plan to broaden its remit to include bond-buying and aiding banks. German Finance Minister Wolfgang Schaeuble and European Financial Stability Fund CEO Klaus Regling played down speculation the ECB would be needed to increase the fund’s heft.

World Waits

“Wait a few more days,” said Regling, when asked for details.

Finance officials will also discuss this week speeding implementation of a permanent rescue plan by a year to next July, according to a working paper obtained by Bloomberg News. ECB Governing Council members Ewald Nowotny and Luc Coene signaled in interviews in Washington that the central bank may say next week it will begin offering banks unlimited liquidity for as long as a year.

Greek Finance Minister Evangelos Venizelos said his country “wants to make it and will make it” and that it will always be a member of the euro area. Prime Minister George Papandreou said yesterday that the EU must take “strategic decisions” and that the end of the global economic crisis “appears even more distant.”

IMF Insufficient

While the IMF vowed to “strongly support” Europe, Managing Director Christine Lagarde warned its $384 billion war chest may not be enough to meet all aid requests if the world economy worsens. The current lending capacity “looks comfortable today but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders,” she said.

The world economy will find some support from emerging markets, which will grow 4.5 percent to 5 percent over the next 12 months, and Japan’s 1.5 percent expansion, El-Erian said.

El-Erian popularized the “new normal” term to describe how growth patterns in the world economy changed after the worst recession since the Great Depression. The firm under-performed most of its bond mutual fund peers this year after a February decision to eliminate U.S. Treasuries from its Total Return Fund backfired as the securities rallied.

JPMorgan Chase & Co. Chief Economist Bruce Kasman said in Washington that Greece is already insolvent and headed toward a depression that will roil the euro area. His team revised their forecasts last week to show the region entering a recession in the next quarter and the ECB cutting its key interest rate on Oct. 6 to 1 percent from 1.5 percent.

“I fear very much that the situation will deteriorate further before it improves,” said Axel Weber, the former president of the Bundesbank, in Washington yesterday. “We will see much more drastic action” by policy makers if the situation in financial markets gets worse.

To contact the reporters on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net. Gabi Thesing in Washington at gthesing@bloomberg.net Rich Miller in Washington at rmiller28@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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Merkel Says Greece Needs ‘Barrier’ to Stave Off Default

By Tony Czuczka - Sep 26, 2011 5:01 AM GMT+0700

German Chancellor Angela Merkel said euro-region leaders must erect a firewall around Greece to avert a cascade of market attacks on other European states that would risk breaking up the currency area.

Expanding the powers of the region’s rescue fund, the European Financial Stability Facility, as agreed by European leaders in July is necessary to avoid Greece’s problems from spilling over to other countries, Merkel said late yesterday on ARD television. The fund’s permanent successor, due to take effect in mid-2013, is needed “so we can in fact let a state go insolvent” if it can’t pay its bills, she said.

“We have to be in a position to react,” Merkel said. “We have to be able to put up a barrier.” Even so, “I don’t rule out at all that at some point we will have the question whether one can do an insolvency of states just like with banks.” She made no mention of setting up the permanent fund before 2013.

Merkel, as the head of Europe’s biggest economy, is at the center of calls by the U.S. and other governments to do more to stop the European sovereign debt crisis as it pounds global financial markets. The situation is “serious” and “there are no easy solutions,” Merkel said in the hour-long interview. She also indicated that she’s being treated for high blood pressure.

‘A Bit Earlier’

Policy makers can make the EFSF more “efficient” by leveraging it without involving the European Central Bank, Finance Minister Wolfgang Schaeuble said over the weekend. He also raised the prospect of bringing in the permanent backstop before 2013. Senior finance officials are preparing to examine the cost advantages of accelerating the start of the fund by a year to 2012, according to a document prepared for meetings this week obtained by Bloomberg News.

“Maybe we can manage it a bit earlier” than 2013, Schaeuble told reporters in Washington on Sept. 24 after the annual meeting of the International Monetary Fund. The current facility is a “preliminary solution and we want a permanent solution as quickly as possible.” Its successor, known as the European Stability Mechanism, will have a “quite different lasting, stabilizing, confidence-creating function” and Germany “would not oppose” bringing it forward, he said.

With global stocks entering their first bear market in two years last week, European policy makers were met with pressure at the weekend from foreign counterparts at the IMF meeting to do more to stop the contagion seeping from Greece.

‘Can’t Force It’

Merkel rejected Greece leaving the euro area, saying that “we can’t force it, but I don’t believe in that in any case” because it would send a signal to financial markets that attacks on euro-area sovereigns can succeed.

“Maybe Greece leaves, the next country leaves and then the next country after that,” she said. “They would speculate against all the countries.” A small group of euro countries would be left at the end, deprived of the euro’s advantage as the currency appreciates, she said.

Merkel suggested that Greece may be able to get the next tranche of bailout aid, after a team of officials from the IMF, the ECB and the European Commission assess the Greek government’s progress in meeting deficit-reduction and other targets. Merkel is due to host Greek Prime Minister George Papandreou for talks in Berlin on Sept. 27, two days before German lawmakers vote on the enhanced rescue fund.

It’s the “troika’s” job to make the ruling on progress made by Greece, she said. “Were they to come back one day and say Greece can’t make it, then we would have to rethink,” Merkel said. “But they aren’t doing that so far.”

EFSF Vote

Merkel said she’ll win legislative approval of the expanded EFSF powers on Sept. 29 on the strength of her governing majority without depending on opposition support. “I want a majority of my own and I’m confident I will get it,” she said. “I’m also going to lobby for it one more time this week.”

For all the turmoil, Germans can have confidence in the euro. “We need the euro,” she said. “The euro is good for us. That is why we need to improve on what has gone wrong in the past.” Changing European treaties to make it easier to enforce budget discipline is one solution, she said. “We have to work toward treaty change.”

To contact the reporter on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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Apple Trims Orders for IPad Parts: JPMorgan

By Bloomberg News - Sep 26, 2011 6:27 PM GMT+0700
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An Apple Inc. employee, right, demonstrates an iPad 2 to customers during the opening of the company's new store in Le Chesnay, near Paris, France. Photographer: Fabrice Dimier/Bloomberg

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An employee demonstrates the application Garageband on an Apple Inc. iPad 2 at the company store in London. Photographer: Chris Ratcliffe/Bloomberg

Apple Inc. is cutting orders to vendors in the supply chain for its iPad tablet computer, a move that may result in slower sales for companies including Hon Hai Precision Industry Co., JPMorgan Chase & Co. said in a report.

Several supply-chain vendors indicated in the past two weeks that Apple lowered fourth-quarter iPad orders 25 percent, the first such cut that analysts at JPMorgan’s electronic manufacturing services team in Hong Kong said they have ever seen. The report didn’t list the affected companies, and Gokul Hariharan, one of the report’s authors, said he couldn’t comment when reached by Bloomberg News today.

For a vendor such as Hon Hai, the cut could mean a drop to 13 million units in the fourth quarter from 17 million units in the third quarter, JPMorgan analysts wrote in the Sept. 25 report. The report said JPMorgan U.S. analyst Mark Moskowitz, who covers Apple, does not expect to lower his projection of 10.9 million to 12 million units of iPad shipments in the third and fourth quarters after the supply chain adjustments.

Reduced orders from Apple to iPad suppliers could reflect both weakening demand in Europe due to economic conditions there as well as a strategy by Apple, the world’s biggest company by market value, to operate with reduced inventory, Wanli Wang, a Taipei-based industry analyst at RBS Asia Ltd., said today.

“It’s back to reality,” Wang said. “Now it seems even for Apple, due to the market situation, we need to be conservative.”

No Confirmation

So far there is no confirmation from Apple that it has reduced orders to suppliers, Wang said. Carolyn Wu, a Beijing- based spokeswoman for Apple, didn’t respond to calls for comment on the report today.

Edmund Ding, spokesman for Hon Hai, didn’t respond to an e- mail or answer calls to his Taiwan and China mobile phones.

Shares of the Cupertino, California-based iPad maker fell 1.5 percent to the equivalent of $400 at 1:25 p.m. in German trading. The stock rose 0.6 percent to $404.30 on the Nasdaq Stock Market on Sept. 23.

Apple’s iPad may account for 73 percent of tablet computer sales this year, according to research firm Gartner Inc. Products that run on Google Inc.’s Android operating system, including Samsung Electronics Co.’s Galaxy tablets, will probably have about 17 percent of the market, Gartner said in a Sept. 22 note.

Because of its current dominant market position, Apple doesn’t have to rush to introduce its iPad 3 tablet computer as potential rivals have failed to emerge to siphon sales from the current model, JPMorgan’s Moskowitz wrote in a Sept. 16 report.

Amazon.com Inc. may release a product late this year that could become the number-two tablet in the market behind the iPad, Moskowitz wrote in that report.

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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Betting on Bernanke Returns 28% for Treasuries

By Daniel Kruger and John Detrixhe - Sep 26, 2011 10:39 AM GMT+0700
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U.S. Federal Reserve chairman Ben S. Bernanke. Photographer: Tomohiro Ohsumi/Bloomberg

Betting on Ben S. Bernanke has been the most profitable trade for government bond investors in 16 years, defying lawmakers in the U.S. and abroad who said the Federal Reserve chairman’s policies would lead to runaway inflation and the dollar’s debasement.

Treasuries due in 10 or more years have returned 28 percent in 2011, exceeding the 24.4 percent gain in all of 2008 during worst financial crisis since the Great Depression, according to Bank of America Merrill Lynch indexes. Not since 1995, when the securities soared 30.7 percent, have investors done so well owning longer-dated U.S. government debt.

The rally continued last week, driving yields to record lows, as the Fed said it would exchange $400 billion of short- term Treasuries for those maturing in more than six years. The move, dubbed Operation Twist by traders, is designed to lower borrowing costs and keep the economy growing. Previous Fed efforts unlocked credit markets and helped ward off deflation.

Bonds are producing “monster” gains, said Mitchell Stapley, the Grand Rapids, Michigan-based chief fixed-income officer for Fifth Third Asset Management, which oversees $22 billion, in a Sept. 19 telephone interview. “I’m dealing with a Federal Reserve with an unlimited balance sheet that is desperately looking for something to do to revive the economy.”

Unexpected Rally

With the U.S. budget deficit exceeding $1 trillion, this year’s rally caught investors by surprise. The lowest forecast among 71 economists and strategists surveyed by Bloomberg News from Jan. 3 to Jan. 11 was for 10-year yields to end this quarter at 2.35 percent, and the median estimate was 3.63 percent. They closed at 1.83 percent last week.

While a financial model created by Fed economists that includes expectations for interest rates, growth and inflation indicates 10-year notes are the most overvalued on record, investors say they can’t afford to not own government bonds.

That’s because stocks and other assets are falling as Europe’s debt crisis deepens, the global economy slows and the Fed commits to keep its target rate for overnight loans between banks at a zero to 0.25 percent through mid-2013.

“The flight-to-safety bid is still fierce,” said Wan- Chong Kung, a bond fund manager in Minneapolis at Nuveen Asset Management, which oversees more than $100 billion, in a Sept. 19 telephone interview. “The fundamentals of very modest growth, modest inflation and a Fed that wants to commit to low rates for a long time continue to be supportive.”

Yields Tumble

Treasury 10-year yields fell 21 basis points, or 0.21 percentage point, last week as the price of the price of the benchmark 2.125 percent security due August 2021 rose 1 30/32, or $19.38 per $1,000 face amount, to 102 20/32. The yield touched a record low of 1.6714 percent on Sept. 23. Thirty-year rates tumbled 41 basis points to 2.90 percent.

Ten-year notes yielded 1.82 percent and 30-year rates were 2.88 percent today as of 12:18 p.m. in Tokyo.

Almost all of the rally in long-term Treasuries this year has come since the end of June, with the securities returning 24.9 percent. That’s the biggest quarterly gain since at least 1978, when the Bank of America Merrill Lynch indexes began tracking the debt.

Treasuries of all maturities have returned 9.3 percent this year, including reinvested interest, beating 2010’s 5.9 percent as Bernanke led the Fed in a second round of bond purchases, buying $600 billion of debt from November 2010 through June in a process known as quantitative easing.

Beating Stocks

That’s more than the 5.2 percent return for the global bond market, 3.9 percent for company debt and 5.6 percent for U.S. mortgage securities, Bank of America Merrill Lynch indexes show. Gold has gained about 19 percent, while the MSCI AC World Index of stocks has lost 14.2 percent, including dividends.

The term premium, which Bernanke cited in a 2006 speech in New York as a useful guide in setting monetary policy, shows Treasuries may be poised to fall. The measure declined to negative 0.67 percent on Sept. 22, indicating the notes are expensive when compared with the average 0.84 percent this decade through mid-2007, just before credit markets froze.

“These low yields spook investors,” said Larry Milstein, a managing director of government and agency debt trading at R.W. Pressprich & Co., in a telephone interview Sept. 23. The New York-based firm is a fixed-income broker and dealer for institutional investors.

Republicans sent Bernanke a letter last week, asking him not to do “further harm” to the economy by adding more monetary stimulus. After cutting rates, the Fed started buying bonds to inject cash into the economy, purchasing $2.3 trillion of government and mortgage-related securities from November 2008 through June.

Republican Critics

“Although the goal of quantitative easing was, in part, to stabilize the price level against deflationary fears, the Federal Reserve’s actions have likely led to more fluctuations and uncertainty in our already weak economy,” according to the message signed by House Speaker John Boehner of Ohio, Senate Minority Leader Mitch McConnell of Kentucky, Senator Jon Kyl of Arizona and House Majority Leader Eric Cantor of Virginia.

The letter is similar to one Boehner and three other Republicans sent Bernanke about a year ago expressing “deep concerns” about the Fed’s plan to print money to buy bonds, saying the central bank risked weakening the dollar and fueling asset bubbles.

Foreign leaders also criticized the policy. Chinese Premier Wen Jiabao said the plan had caused a “major problem” leading to instability in the currency market, and German Finance Minister Wolfgang Schaeuble said the policy was “clueless.”

Avoiding Deflation

While the Fed failed to reduce the unemployment rate below 9 percent, the second round of quantitative easing, or QE2, warded off deflation, which can damage an economy by discouraging investment. Consumer prices excluding food and energy rose 2 percent in the 12 months ended Aug. 30, compared with 0.6 percent in October 2010, the smallest increase since at least 1958, government data show.

Rather than collapsing, the dollar has risen 2.6 percent to 78.501 against the currencies of six major U.S. trading partners including the euro and yen, since the Fed announced QE2 in November, based on IntercontinentalExchange Inc.’s Dollar Index.

“I’m not sure the Republicans’ grasp of the Fed and everything that goes with it is particularly strong,” said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut, in a Sept. 22 telephone interview. “The data confirms the Fed’s concerns. If there’s uncertainty and a lack of confidence, the focal point is not at the Federal Reserve, but much more in the hands of the people that wrote this letter.”

Unfreezing Credit

QE2 followed QE1, which was designed to inject money into the financial system to help unfreeze credit markets. Corporate bond sales worldwide soared to $3.9 trillion in 2009, from $2.9 trillion in 2008, according to data compiled by Bloomberg.

Demand for Treasuries has been fueled by data showing the economy almost stalled in the first half of 2011, and added no jobs in August, keeping unemployment at 9.1 percent. The Organization for Economic Cooperation and Development cut its forecast for growth in the U.S. on Sept. 8 to 1.1 percent this quarter and 0.4 percent in last three months of the year. Its prior estimates were 2.9 percent and 3 percent.

“This is beginning to look like more of a systematically low-interest-rate world,” said Robert Tipp, the chief investment strategist in Newark, New Jersey at Prudential Fixed Income, which oversees $300 billion in bonds, in a Sept. 20 telephone interview. “The outcome for Treasuries is likely to be favorable over the next year or so, unless you get much stronger than expected economic growth.”

‘Significant’ Risks

At the close of its two-day meeting Sept. 21, the Federal Open Market Committee cited “significant downside risks” in the U.S. economy and said it will buy bonds due in six to 30 years through June while selling an equal amount of debt maturing in three years or less. The purchases “should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the Fed said in its statement.

Policy makers last week also announced a measure to support the mortgage market by reinvesting maturing housing debt into mortgage-backed securities instead of U.S. government debt.

Even with the rally, the difference between 10- and 30-year Treasury bond yields, at 1.07 percentage points, remains wider than its average of about 0.5 percentage point during the past two decades. That suggests the gains in longer-term debt have scope to continue, said Michael Materasso, senior portfolio manager and co-chairman of the fixed-income policy committee at Franklin Templeton Investments in New York, in a Sept. 22 telephone interview. The firm oversees $298 billion of bonds.

“There’s more than one fund manager that wishes they had a lot more allocated to Treasuries,” said Jeff Given, part of a group that manages $18 billion of bonds at MFC Global Investment LLC in Boston, in a Sept. 23 telephone interview. “They did much better than anybody would have predicted.’”

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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