Pimco's El-Erian favors Brazil's bonds, Chinese yuan

Brazilian sovereign bonds and Chinese yuan non-deliverable forwards are attractive, El-Erian, co-chief investment officer at Pacific Investment Management Co., said yesterday, in Sydney, during a Bloomberg television interview. Greece needs outside help as it tackles the European Union's (EU's) largest budget shortfall, he said.

Pimco portfolio managers are reducing their riskiest positions, El-Erian said. Debt strains in Greece, Portugal and Spain, along with the emphasis on non-developed markets, underscore Pimco's view that 2010 will be a year of slower-than-average growth and a shrinking global role for the United States (U.S.) economy.

“We have been moving up in quality, which has meant certain sales of high-yield names,' said El-Erian, 51, who is also author of the book “When Markets Collide.' “We've been very selective on which sovereigns we are exposed to.'

The next six months will be healthy for the U.S. economy, though the expansion may slow after that, El-Erian said during a trip to Sydney for a symposium sponsored by the Reserve Bank of Australia.

Pimco, based in Newport Beach, California, has about US$1 trillion in assets under management. It is a unit of Munich- based insurer Allianz SE.

Brazil is poised to be Latin America's first major country to raise borrowing costs after leading the region out of the global recession last year, according to Bloomberg surveys of economists.

Pimco prefers Brazilian debt over that from “much of the G-7' countries in part because of the central bank's “hawkish' inflation stance, Michael Gomez, a co-head of emerging markets, said in a Feb. 4 interview.

Gomez also said China will loosen currency controls in 2010 and allow the yuan to gain, in a separate interview Dec. 10. International investors use forwards, agreements to buy and sell assets at current prices for delivery at a future specified time and date, to bet on the yuan. Non-deliverable contracts are settled in dollars.

China's economy will grow 6 percent or more in the coming years, El-Erian told reporters at a separate briefing.

Greece is trying to persuade financial markets it can restrain its budget shortfall without outside assistance, while borrowing costs are also climbing for Portugal and Spain. Credit-default swaps on the debt of all three countries rose to records last week, increasing demand for the relative safety of U.S. government securities.

Credit-default swaps are contracts designed to protect against or speculate on default.

“It's going to take years to sort out the sovereign balance sheet issue,” El Erian said at the briefing. “Europe has become a huge game of chicken, whereby the Greeks are waiting for help from outside and donors are waiting for Greece to take a step forward.”

Greece, which had the EU's widest budget deficit at 12.7 percent of output last year, has struggled to convince investors it can bring the budget shortfall within the bloc's limit of 3 percent.

Pimco's Total Return Fund, run by Bill Gross, handed investors a 15.1 percent gain in the past year, beating half of its competitors, according to data compiled by Bloomberg.

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