Bloom returning to bond market

THE bond market turmoil is almost over, with the shock of the interest rate increase having been absorbed and yields at attractive levels to lure new buyers, says Julius Baer Investment Advisory chairman Peter Widmer.

The Swiss-based firm, with about US$30 billion under management, believes longer-term bonds are now offering relatively good returns, preferring Continental bonds to United States and yen bonds.

Mr Widmer said: ''The yield on the US 30-year Treasury bonds rose from 5.8 percentage points in the fourth quarter last year to 7.2 percentage points now, and inflation has not gone up. It has come down to a level that can attract new buyers.'' The strategy for the coming few months is to underweight dollar block bonds, over-weight European bonds such as French franc and sterling bonds, and hedge the yen into the US dollar for US-based accounts.

The relative weakness of the US dollar and all-time strength of the yen make both bonds expensive to foreign investors.

''The weakness of the US dollar is an added burden to foreign investors who then have to hedge the currency risk,'' he said.

Although long-term rates in Europe would remain stable, the rate in the short end would come off a bit, he said.

''How fast this would come down depends on the pace of economic recovery in Europe.'' He said the bond market was healthier, with the squeezing out of speculative funds which took hefty losses in the first quarter through their highly leveraged positions.

Mr Widmer forecast this year's annual return would be four to five per cent, compared with 17 per cent last year.

''That means we have a lot of catching up to do in the third and fourth quarter,'' he said.

On the equities side, Mr Widmer said he favoured European and Asian stocks over American or Japanese.

Supported by good corporate earnings, French and German stocks are more attractive than US equities, which are at an expensive 20-times-plus price-earnings ratio.

While Asian stock markets were experiencing a consolidation, he did not expect strong economic growth from Japan.