SÃO PAULO, Brazil -- Brazil's securities and exchange commission said on Thursday that it had opened a new formal investigation into the business dealings of the onetime billionaire Eike Batista.

The commission, known as the CVM, is examining whether Mr. Batista and five other executives of the petroleum company OGX may have violated several articles of Brazil's corporate legislation.

Brazil's rules require management to release material information that could influence a company's share price as well as disclose information about their personal ownership stakes in the company.

In March, regulators had opened a separate inquiry into whether Mr. Batista might have violated disclosure rules.

The CVM has not revealed what specific events led to either inquiry, but OGX frequently announced major petroleum discoveries that subsequently proved to be economically unviable.

The new inquiry is the first indication that Mr. Batista or other top managers of his companies may possibly have changed their ownership stakes in an illegal manner, as the assumption has been that Mr. Batista has been hurt along with his investors.

Shares in OGX fell more than 7 percent on Thursday morning in São Paulo, trading around 38 centavos apiece, or about 16 cents.

The latest problem just adds to the woes of Mr. Batista, who was once Brazil's richest man and had vowed to become the world's richest as well.

When OGX went public in June 2008, it sold shares to investors at 1,131 reais apiece, or about $690 at the exchange rate at the time.

The company had a 100-1 share split in December 2009. But an investor who bought OGX shares at its I.P.O. price would now have lost over 96 percent of the original investment.

In recent months, Mr. Batista's other companies have seen similar collapses in their share prices, as cash flow proved insufficient to service debt and to make the extensive investments that were supposed to create an empire of energy, mining and logistics companies.

Mr. Batista's fortune, once over $30 billion, has collapsed with it, and he has sold off several assets in recent months.

In August, Mr. Batista sold a controlling stake in his logistics firm LLX to the energy investment firm EIG Global Energy Partners, based in Washington. The same month, OGX hired the Blackstone Group as a financial adviser, a possible sign that either a sale or a debt restructuring is near.

The company is producing hardly any petroleum, and it must make bond payments of about $40 million in October and $100 million in December.

The world's largest bond investment firm, Pimco, invested heavily in OGX's bonds and is leading a creditor committee that is negotiating with OGX.

Mr. Batista ostentatious lifestyle had once been popular gossip fodder. He raced speedboats, married a famous model and had dinner with Madonna. But since his fortunes have fallen, he has been forced to sell or pull back on his holdings.

Among the other assets he is seeking to sell is a luxury hotel in Rio de Janeiro, the Hotel Glória.

An attempt to sell his $19 million yacht, the Pink Fleet, failed, and Mr. Batista sent the yacht to the junkyard last month to be scrapped, presumably to save on maintenance costs.

This is a more complete version of the story than the one that appeared in print.

PHOTO

Copyright (c) 2013 The New York Times Company

MARKETS continued to pile the pressure on Mark Carney, the Bank of England Governor, by moving further against his interest rate guidance after the central bank left monetary policy unchanged this month.

. Both government borrowing costs and sterling spiked yesterday after the Bank held rates at 0.5pc, maintained the quantitative easing (QE) programme at £375bn and decided against issuing a statement to try to bring markets into line.

. It was the first time since Mark Carney took over as Governor in July that the announcement was not accompanied by a broader comment, despite the challenge posed to his credibility by the markets' bet against "forward guidance".

. While the Bank has signalled there will be no move in rates until late 2016, markets believe the first rise will come in mid–2015 in light of the UK's rapidly improving economic prospects. Traders said the lack of a statement may "make the Bank's job harder" as it could be interpreted as a capitulation.

. Mike Amey, managing director at bond giant Pimco, said: "By issuing no statement the [Bank does] not see the [rise] in yields as being sufficient to risk the recovery, and as such the market has continued to sell off to new yield highs."

. Kathleen Brooks, a director at Forex.

. com, said: "The lack of a statement today could make the Bank's job harder. By not releasing a statement what else is the market expected to do apart from question the Bank's commitment?" Since the Bank unveiled its commitment on August 7 to keep rates at rock–bottom until unemployment falls to 7pc, government borrowing costs for two–year debt have risen by almost 0.15 percentage points. They rose again yesterday, by 6.8 basis points to 0.535pc – a two–month high.

. The European Central Bank also left rates at a record low of 0.5pc, and its president, Mario Draghi, reiterated his pledge to hold them for "an extended period". Like the UK, markets have been sceptical about the commitment.

. Mr Draghi said the ECB had only been "moderately successful" in ensuring there was not an "overreaction in market interest rates".

. The ECB also revised its growth outlook for the eurozone, predicting contraction of 0.4pc this year rather than 0.6pc. But it lowered its growth forecast for next year from 1.1pc to 1pc.

Copyright © 2013 The Telegraph Group Limited, London

RIO DE JANEIRO, Sept 5 (Reuters) - Brazilian tycoon Eike Batista will ask creditors of his debt-strapped oil company OGX to become shareholders and inject new cash, in a last ditch attempt to avoid seeking bankruptcy protection, Folha de S.Paulo newspaper said on Thursday.

The plan will be presented to bondholders of OGX Petróleo e Gás Participações SA next Tuesday in New York, Folha said, citing five people involved in the negotiations.

However, an OGX spokeswoman told Reuters it was not true that the company had scheduled a meeting with bondholders for next week. She said the company is "in the process of restructuring" its debts, but gave no details.

About 40 percent of OGX's bonds are held by six large international groups such as PIMCO and BlackRock funds, while the remaining 60 percent is divided among dozens of investors.

In mid 2012, OGX's failure to meet production targets created a downward spiral among several companies of Batista's EBX Group. The sell-off has reduced the value of most of the six publicly traded companies in the group by more than 90 percent.

Batista, who has been selling OGX's stock to raise money and pay debt, will try to convince creditors to convert $3.6 billion worth of the company's bonds into stock, and to inject an additional $250 million to $500 million in the business.

The alternative would be to seek court protection that would allow OGX to halt debt payments until a restructuring plan is approved.

It is not clear how many shares Batista would give bondholders for participating in the plan. He currently holds a little over 50 percent of the company after five sales of stock in the last week.

Creditors will pressure Batista to fulfill his promise to inject $1 billion into OGX through a "put option" that requires him to buy OGX stock at 6.30 reais a share by April 30, 2014, should the company's board think it is needed. Company shares were down nearly 5 percent Thursday at 0.39 reais.

According to Folha, Batista would give up all of his OGX's shares to avoid making that cash injection.

PROGRESS IN MMX TALKS

Meanwhile, talks to transfer control of the MMX mining unit in Batista's struggling commodities empire for up to $1 billion are entering the final stretch, reported newspaper Estado de S. Paulo on Thursday, citing unnamed sources close to negotiations.

Bidders for MMX Mineração e Metalicos SA include Dutch-based trading house Trafigura, London-listed Glencore and a consortium formed by Abu Dhabi's Mubadala sovereign wealth fund , according to the newspaper.

Representatives of the companies mentioned in the Estado report could not immediately be reached for comment.

The deal is likely to mirror stake sales in energy firm MPX Energia SA and port operator LLX Logistica SA , in which the companies raised capital through new share sales without Batista's participation.

Offers range from 2.60 reais to 2.80 reais per new share of MMX, in a capital increase ranging from $500 million to $1 billion, the newspaper reported. MMX shares closed at 2.20 reais on Wednesday.

Don't miss these top money and investing features:

* Your U.S. stocks are more foreign than you know

* Why your mutual fund portfolio has done so badly.

* 5 ways to prepare for higher interest rates

* Emerging markets are crumbling like BRICs

* Focus on funds: Hi-yo silver!

Investors tend to keep their money in shares of domestic companies, preferring the familiar over the foreign. But fortunately for them, many of those companies are world travelers.

Big companies especially know there's a world beyond their home markets. Almost 50% of the revenue that Standard & Poor's 500 Index members earned in 2012 came from outside of the U.S. If the S&P 500 carried a passport, the pages would be full.

That's crucial for individual investors. International-stock exposure is important for both diversification and opportunity. The U.S. market is massive, and investors have done well by it, but it's still just one-third of the world's total market value.

Stockholders need more exposure to global markets -- either directly or through mutual funds and exchange-traded funds. So go ahead, say "bye America" and buy more international investments.

But if you won't, the S&P 500 companies in your portfolio will.

-- Jonathan Burton

INVESTING NEWS & TRENDS

Your U.S. stocks are more foreign than you know

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When the term BRIC was coined, it was thought the Russia would advance economically along with the three other countries mentioned, but that has been anything but the case, and will probably continue to be so.The 'R' in BRIC doesn't stand for ROI

Why your mutual fund portfolio has done so badly

Conventional wisdom suggests a well-diversified stock portfolio will generate reasonable returns over time. Unfortunately, writes investment adviser Ty Bernicke, over the past 12 years, conventional wisdom failed. Why your mutual fund portfolio has done so badly.

5 ways to prepare for higher interest rates

Investors have an opportunity to prepare for higher interest rates, writes Jeff Reeves. Here's how to do it.5 ways to prepare for higher interest rates

Is reopened Fairholme Fund worth the risk?

The answer depends on whether you have reason to believe that in casting your lot with Bruce Berkowitz you are getting the best large-cap value of the last 10 years, or the one that is nearly dead last in the category over the last three years.Is reopened Fairholme Fund worth the risk?

5 ways to invest in the euro-zone revival

The worst of the euro crisis is over, for now. Here are five ways to invest in the euro-zone recovery, according to Matthew Lynn.5 ways to invest in the euro-zone revival.

Pimco sitcom: dreamer Gross vs. worrywart El-Erian

The two leaders of one of America's most powerful money firms, Bond King Bill Gross and CEO Mohamed El-Erian, sound like parents at war on a television sitcom. One an aggressive optimist. The other a pessimist who even calls himself a "worrywart."Pimco sitcom: dreamer Gross vs. worrywart El-Erian.

Emerging markets are crumbling like BRICs

Multiple Latin debt crises and the 1997-98 Asian emerging-market meltdown have been largely forgotten. Yet nowadays the risk of another emerging market crisis is all-too real, writes Satyajit Das.Emerging markets are crumbling like BRICs.

Emerging markets are bargains, not traps

Emerging stock markets, touted as the can't-miss investments for the long term, have missed pretty badly during the long term that began six years ago. But now might be a good time for investors to target these developing countries, writes Conrad de Aenlle.Emerging markets are bargains, not traps.

Will tech startups survive the next recession?

Do the hot new tech companies have the strength to survive the tough times?Will tech startups survive the next recession?

Focus on funds: Hi-yo silver!

The economically sensitive metal headed higher, thanks in part to news from China. Also: Frontier markets are having a good year, and a new way to invest in hedge funds.Focus on funds: Hi-yo silver!

-MarketWatch; 415-439-6400; AskNewswires@dowjones.com

NEW YORK (MarketWatch) -- Treasury prices tumbled on Thursday as the benchmark 10-year note yield pushed past 3%, a psychological threshold emblematic of its sharp climb since early May.

The 10-year note (10_YEAR) yield, which moves inversely to price, climbed as high at 3.005% in late trade, according to FactSet. It last changed hands at 2.997%, up 9.5 basis points on the day, and its highest closing level July of 2011.

The 5-year note (5_YEAR), along with the middle portion of the yield curve, has been selling off the hardest in recent days. The yield climbed 10.5 basis points to 1.853%, its highest level since May 2011.

The shorter end of the curve also rose more than it usually does, considering the Federal Reserve's commitment to keeping short-term interest rates low. The 2-year note (2_YEAR) yield rose 4.5 basis points to 0.522%.

The 30-year bond (30_YEAR) yield rose 8.5 basis points to 3.885%.

The four-month selloff in bonds picked up this week, with foreign central banks leading the way, said Thomas di Galoma, co-head of fixed-income rates trading at ED&F Man Capital Markets.

Federal Reserve indications that it will back away from its current monetary stimulus policies have sent shudders through emerging markets that threaten to hit Treasurys in a self-reinforcing cycle.

"I don't think there's anything magical about 3%, mainly because the central banks have been selling Treasurys as a defense mechanism because their currencies are weak," di Galoma said.

Treasurys were weaker going into the U.S. trading day, but continued to slide after mostly positive economic news.

An ADP report showed private-sector employment growth slowed to 176,000 in August, below consensus expectations of 185,000, and lower than July's revised gain of 198,000. Weekly jobless claims, however, dropped to their lowest level since October 2007 last week, with the number of people applying for unemployment benefits down by 9,000 from the prior week to 323,000.

The labor data serve as a warm-up of sorts for what may turn out to be a pivotal Friday jobs report, in which economists polled by MarketWatch expect nonfarm-payroll gains of 170,000. That may play into the Federal Reserve's decision on whether it will begin curbing its $85 billion in monthly bond buys. But the predictive power of the ADP report is mixed at best, strategists say.

"There's been a decent amount of variation between ADP and the nonfarm payroll number," said Robert Tipp, chief investment strategist at Prudential Fixed Income. "Over time, it's a pretty unbiased nonfarm predictor, but at any time it could be plus or minus 50,000."

Data on Thursday also showed revised U.S. second-quarter productivity jumped 2.3%, above the prior read of 0.9%, and economist expectations of 1.9%.

An ISM survey of purchasing managers climbed at its fastest pace on record in August, jumping to 58.6% from 56.0% in July.

Given the recent selloff on the back of uncertain Fed monetary policy, Pimco's Bill Gross said in a letter to investors Thursday that investors should buy short-maturity bonds.

While the market largely expects the Fed to announce initial actions to begin winding down its stimulus this month, officials have said the decision hinges upon improvement in economic data.

Meanwhile, the Bank of England and European Central Bank both held their policy rates steady. The ECB upgraded its projections for gross domestic product in 2013 to negative 0.4% from negative 0.6%. However, ECB President Mario Draghi acknowledged downside risks to the European economy. Read a recap of the ECB press conference.

Government bonds sold off across Europe alongside Treasurys. The 10-year German bond, or bund, yield was up 11 basis points to 2.045%, breaching 2% for the first time in 17 months.

The United Kingdom's 10-year bond, or gilt , yield was up 13.5 basis points at 3.011%, its first time above 3% since July 2011.

-Ben Eisen; 415-439-6400; AskNewswires@dowjones.com

Treasury 10-year note yields rose to 3 percent for the first time in two years as a strengthening U.S. employment market increases speculation the Federal Reserve will announce plans to slow its bond-buying program this month.

The yield on the benchmark security for everything from corporate to mortgage loans last breached that level on July 27, 2011, when lawmakers debated raising the nation's debt limit. Fed officials are monitoring progress in the labor market as they consider dialing back their $85-billion-a-month program designed to fuel the expansion. A Labor Department report today may show companies added 180,000 workers last month and the unemployment rate held at the lowest level since 2008. The Fed's next policy meeting is Sept. 17-18.

“U.S. data are driving yields,” said Tony Morriss, the head of interest-rate research at Australia & New Zealand Banking Group Ltd. in Sydney. Prospects for a pickup in payrolls have “quite clearly brought forward some expectations for when actual short-term interest rates can be raised.”

Benchmark 10-year yields were little changed at 2.98 percent as of 8:11 a.m. London time, according to Bloomberg Bond Trader data. Today's high was 3.005 percent, climbing from 2013's low of 1.61 percent on May 1. The 2.5 percent note due in August 2023 traded at 95 7/8.
Employment Market

Jobless claims declined by 9,000 to 323,000 in the week ended Aug. 31, less than the lowest estimate of economists surveyed by Bloomberg, from a revised 332,000, according to Labor Department data issued yesterday in Washington. Another report showed productivity climbed more than previously estimated in the second quarter.

Companies boosted employment by 176,000 workers in August from a 198,000 gain in July that was revised down, figures from the Roseland, New Jersey-based ADP Research Institute showed yesterday. The median forecast of 43 economists surveyed by Bloomberg called for a 184,000 gain.

The Labor Department report may show the unemployment rate held at 7.4 percent last month, according to the median estimate in a Bloomberg survey.

The employment “data point will be the deciding factor” for the Fed, said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York.
Value Measure

With yields rising, the 10-year term premium signaled that the securities are the cheapest since 2011. The model, which includes expectations for interest rates, growth and inflation, was at 0.63 percent yesterday, the most since May 10, 2011. It was negative as recently as June 18. The 10-year average is 0.23 percent. A positive reading indicates that investors are getting yields that are above what is considered fair value.

Accelerating U.S. growth has prompted Fed Chairman Ben S. Bernanke to pledge to slow monetary stimulus if the economic expansion meets policy makers' forecasts. The U.S. central bank will reduce its monthly purchases at its meeting this month, according to 65 percent of economists in a Bloomberg survey last month.

Three-month implied volatility on U.S. 10-year interest-rate swaps climbed to 118.8 basis points yesterday, the highest since July 8, according to data compiled by Bloomberg. The average over the past year is 79.30. The gauge is a measure of projected yield fluctuations over the next 90 days.

“We've had a strong move to the upside” in yields, said Karsten Linowsky, a fixed-income strategist at Credit Suisse Group AG in Zurich. “Everyone is waiting for these events, like the payrolls and the Fed meeting, and that's why we've seen pressure to the upside in yields.”
Rate Outlook

The Fed has kept its target for overnight lending between banks at almost zero since December 2008. Investors see about a 70 percent chance policy makers will raise the so-called federal funds rate to 0.5 percent or more by January 2015, data compiled by Bloomberg from futures contracts show.

Pacific Investment Management Co.'s Bill Gross, manager of the world's biggest bond fund, said investors should buy short-term Treasuries and credit securities that will be bolstered by the Fed's intent to keep benchmark lending rates at almost zero.

“The safest pitch to swing at may not be stocks, but the asset that will soon be the nearly sole focus of central banks,” Gross wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco's website yesterday. “Instead of QE, central bankers are shifting to forward guidance, which if reliable, allows financial markets and real economies to plan several years forward in terms of financing rates and investment returns.”

Gross's Pimco Total Return Fund (PTTRX) has dropped more than $41 billion, or 14 percent of its assets, during the past four months through losses and investor withdrawals. The $251 billion fund suffered $7.7 billion in net redemptions in August, Chicago-based researcher Morningstar Inc. (MORN) said yesterday in an e-mailed statement, the fourth straight month of withdrawals and the second-highest amount this year.

Global insurers like Allianz,  American International Group and Munich Re are the world's main bond investors and they currently find themselves caught between a rock and a hard place. On one hand, ultra-low European interest rates will continue to dampen investment returns. On the other, there's the clear threat that capital market rates in the U.S. and elsewhere could rebound too quickly, which would also pose a serious problem for the industry, recent market turmoil shows.

“The interest rate environment continues to be the biggest challenge. This doesn't only apply for the overall low level of interest rates, but also for sudden and short-term rate moves up and down,” Allianz Chief Executive Michael Diekmann told investors Friday.

Recent market gyrations illustrate that the threat is quite imminent. In June, government bond yields worldwide rallied when the Fed signaled it could stop supporting bond markets. In a widespread selloff in financial markets, yields of 10-year US Treasuries surged to 2.6% from 2.19% within a week, echoed by similar moves in government and corporate bonds worldwide. And bond funds such as the flagship Total Return Fund of Allianz's Pimco unit saw almost $10 billion in net outflows in June, according to fund tracker Morningstar Inc., after $1.3 billion in May.  And 10-year U.S. Treasury yields traded above 3% for the first time in over two years, reaching a peak of 3.007% in Asian hours Friday.

The simple logic: investors sell lower-yielding bonds they previously held in favor of new, higher-yielding investments.

Bond yields and bond prices move in opposite directions. If bond yields rise, insurers holding the bonds are required to write down the bond price to market value and record an unrealized loss on the balance sheet. In the current low interest rate environment, this is a real threat for bond investors.

“The turnaround in interest rates offers a lesson on how fast a drop in bond prices can eat up the coupons of several years,” Asoka Woehrmann, co-chief investment officer of Deutsche Asset & Wealth Management, wrote in a recent customer publication, pointing to bonds with a current coupon of 2%.

In simple math: If the yield of a 10-year bond with a 2% coupon rises 0.4 percentage point, the bond price drops 350 basis points, or 3.5 percentage points. The bond is then only worth 94.7% of its nominal value instead of 98.2%. For longer-dated bonds the impact of rising yields on falling prices is even stronger.

And Fitch Ratings warned in a recent research note that a too-quick rate rebound could shave off up to one-third of the market value of long-term bonds.

Recently issued bonds could become unrealized losses on the balance sheet if the bond price falls under the redemption value, said Felix Hufeld, who oversees insurers at German financial services regulator BaFin.

Now changes in bond price and yield aren't neccessarily a problem for insurers. While banks have to mark the bond daily to market value, and realize any losses in their trading book, insurers usually hold the securities until maturity, when they get their loans back. Only if insurers sell a bond before maturity can it become a realized loss for them.

“As long as insurers aren't obliged to liquidate assets, that doesn't matter to them, “ says BaFin's Mr. Hufeld.

Still, in countries where surrender charges are low, this could become a problem if a large number of policyholders lapse existing insurance policies to lock in better interest rates with a new investment. In that case, insurers may be required to sell fixed-income assets at a loss to finance immediate policyholder payouts.

While such a risk exists, “customers, especially in Germany, don't tick that way,” Mr. Hufeld says. Indeed, the impact of the protracted ultra-low interest rates is clearly much worse than a rate reversal would be, he says.

Europe's top insurance regulator has a similar assessment. For European insurers, “the low interest rate environment is more problematic than a sudden shift in the interest rate policy in the U.S.,” says Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority. This is because EU-domiciled insurers invest the bulk of their assets in Europe, rather than in the U.S., Mr. Bernardino said.

After the recent market turmoil provided a wake-up call for bond investors, the gradual tapering of the Fed's bond-buying program is now priced in, which Karl Happe, chief investment officer at Allianz Global Investors, calls “a healthy development.”

Regardless, both market participants and regulators hope for a gradual, smooth rate transition over the next years.

For big institutional investors, predictable and moderate rate changes are key while sudden erratic rate moves are difficult to adapt to, Mr. Diekmann said.

“In a smooth transition, step by step, the impact will not be so huge, and insurers will have more time to prepare themselves, to adapt their portfolios to the new environment,” says Mr. Bernardino. Rising rates will lift yields on new bonds insurers are buying, and help investment returns.

Nevertheless, insurers, “will definitely have some kind of ‘what-if scenario' that will tell them what happens to their portfolios if interest rates go up 100 basis points or 200 basis points, what are the sensitivities, what measures are needed to prepare for that,” Mr. Bernardino says.

(Thomas Leppert contributed to this report.)

... “By issuing no statement, the MPC do not see the back up in yields as being sufficient to risk the recovery,” said Mike Amey, a money manager at Pacific Investment Management Co. in London. “As such the market has continued to sell off to new yield highs.” ...

... Jacobson: Right, and again, it's important to mention these are the highest-rated funds in the intermediate-bond categories, it's not the category itself. But one of the best performers was Dodge & Cox Income DODIX, and it only lost about 2% during the two-month period, and one of the worst was PIMCO Investment Grade Corporate PIGIX, which lost more than 6% during those two months.

Benz: I want to back up and discuss what Dodge & Cox got right during that period, but first let's talk about what's going on at that PIMCO fund. Obviously, we're looking at a very short time frame here. In fact, the manager [Mark Kiesel] was our [Fixed-Income] Fund Manager of the Year in 2012. But what was working against it in this interest-rate shock that we saw? ...

More.....with video

(Copyright (c) 2013, Dow Jones & Company, Inc.)

As some investors clamber to buy oil before a potential U.S. strike in Syria, others are advocating what seems like a counterintuitive strategy: sell, sell, sell.

Against common wisdom, some say military action in Syria is more likely to cause prices to fall because markets have already risen in anticipation of a U.S. intervention and there is little actual oil at risk in Syria.

"The higher the run-up prior to the event, the greater the post-event decline," said Morgan Stanley in a note this week. "We would be sellers on any upward price action on military intervention in Syria."

History shows that when conflicts aren't likely to directly affect oil supply, they can ultimately lead to even lower prices. In a study of major conflicts in the Middle East since the 1973 oil crisis, Morgan Stanley found that in most Middle Eastern conflicts -- including when Israel bombed an Iraqi nuclear reactor in 1981 and the U.S.-led invasion of Iraq in 2003 -- oil prices were lower six months after the initial price surge.

The price of Brent crude oil last week hit a six-month high, topping $117 a barrel, as the prospect of a Western military intervention in Syria rattled investors. This was up nearly $18 since the end of June. On Thursday, ICE Brent for October delivery gained 35 cents a barrel, or 0.3%, to $115.26.

"If this is a very quick thing and we lob a few Tomahawk missiles and destroy a few runways and nothing happens from there, then prices will easily come down $4 or $5," said Tariq Zahir, managing member of Tyche Capital Advisors LLC. "I do think it's basically priced in."

Mr. Zahir, whose firm -- a commodity-trading adviser based in New York -- has about $3 million of assets under management, is selling front-month oil contracts and buying later-month contracts because he thinks oil prices for immediate delivery aren't likely to rise.

Syria's impact on prices may be particularly overstated because it produces only a small amount of oil. The country's output was 50,000 barrels a day in July, compared with about 350,000 a day before the civil war that began in March 2011, according to the International Energy Agency, based in Paris. Saudi Arabia, by comparison, produces 9.8 million barrels of oil a day.

Nicholas Johnson, a commodities portfolio manager at Pacific Investment Management Co., or Pimco, who oversees $30 billion in assets, said dwindling oil production in Libya, rather than fears about a spillover from U.S. intervention in Syria, was largely responsible for the recent rise in oil prices. Once Libyan production comes back online, prices will likely fall, he said.

Mr. Johnson said he has little exposure to oil because of the uncertainty in markets. "It's very clearly headline driven. It really depends on what people think the second-order effects in the region are likely to be," Mr. Johnson said.

Another reason some investors expect a drop in oil prices is because markets tend to factor in geopolitical concerns before any event. Brent net long positions -- bets that prices will rise -- rose to a record high in the week ended Aug. 27, according to IntercontinentalExchange Inc. The rise means there is potentially a greater risk of a price correction if money managers run for the exit at the same time.

To be sure, there is a risk that military intervention could inflame tensions in the region, which may lead to disruption in oil markets. Major oil producers such as Saudi Arabia are nearby, while an intervention in Syria could serve as a catalyst for escalation of the sectarian conflict in Iraq, a key concern for oil traders. It is also possible the U.S. won't intervene at all.

"The markets will always run ahead of specific events, but the big issue is the fact that there is so little spare production capacity for crude oil anywhere in the world," said David Donora, head of commodities at Threadneedle Investments. "What spare capacity there is does reside within OPEC and is right in the middle of where these destabilizations are taking place."

Threadneedle, which has $1.2 billion under management in commodities, is betting oil prices will move higher in the medium term.

But for now Mr. Donora said that because the market is expecting a very limited strike, he would be surprised if there is a more-than-$5 move in the price of crude oil and for that move to be very short-lived.

Others are skeptical about whether investors would actually sell, leading to lower prices, in the event of military intervention.

... Nicholas Johnson, a commodities portfolio manager at Pacific Investment Management Co., or Pimco, who oversees $30 billion in assets, said dwindling oil production in Libya, rather than fears about a spillover from U.S. intervention in Syria, was largely responsible for the recent rise in oil prices. Once Libyan production comes back online, prices will likely fall, he said. ...

... The rise in demand for 15-year mortgage-backed securities has sharply reduced their value as a protection from rising rates, said Daniel Hyman, co-head of agency MBS at Pacific Investment Management Co., a unit of Allianz SE. "They are so expensive."
[image]

Even so, traders say Treasury prices likely will find some support as the 10-year yield surpasses 3%, given the inflation backdrop remains tame and the economic recovery is still uneven. ...

RIO DE JANEIRO, Sept 5 (Reuters) - Brazilian tycoon Eike Batista will ask creditors of his debt-strapped oil company OGX to become shareholders and inject new cash, in a last ditch attempt to avoid seeking bankruptcy protection, Folha de S.Paulo newspaper said on Thursday.

The plan will be presented to bondholders of OGX Petróleo e Gás Participações SA next Tuesday in New York, Folha said, citing five people involved in the negotiations.

However, an OGX spokeswoman told Reuters it was not true that the company had scheduled a meeting with bondholders for next week. She said the company is "in the process of restructuring" its debts, but gave no details.

About 40 percent of OGX's bonds are held by six large international groups such as PIMCO and BlackRock funds, while the remaining 60 percent is divided among dozens of investors.

In mid 2012, OGX's failure to meet production targets created a downward spiral among several companies of Batista's EBX Group. The sell-off has reduced the value of most of the six publicly traded companies in the group by more than 90 percent.

Batista, who has been selling OGX's stock to raise money and pay debt, will try to convince creditors to convert $3.6 billion worth of the company's bonds into stock, and to inject an additional $250 million to $500 million in the business.

The alternative would be to seek court protection that would allow OGX to halt debt payments until a restructuring plan is approved.

It is not clear how many shares Batista would give bondholders for participating in the plan. He currently holds a little over 50 percent of the company after five sales of stock in the last week.

Creditors will pressure Batista to fulfill his promise to inject $1 billion into OGX through a "put option" that requires him to buy OGX stock at 6.30 reais a share by April 30, 2014, should the company's board think it is needed. Company shares were down nearly 5 percent Thursday at 0.39 reais.

According to Folha, Batista would give up all of his OGX's shares to avoid making that cash injection. Meanwhile, talks to transfer control of the MMX mining unit in Batista's struggling commodities empire for up to $1 billion are entering the final stretch, reported newspaper Estado de S. Paulo on Thursday, citing unnamed sources close to negotiations.

Bidders for MMX Mineração e Metalicos SA include Dutch-based trading house Trafigura, London-listed Glencore and a consortium formed by Abu Dhabi's Mubadala sovereign wealth fund , according to the newspaper.

Representatives of the companies mentioned in the Estado report could not immediately be reached for comment.

The deal is likely to mirror stake sales in energy firm MPX Energia SA and port operator LLX Logistica SA , in which the companies raised capital through new share sales without Batista's participation.

Offers range from 2.60 reais to 2.80 reais per new share of MMX, in a capital increase ranging from $500 million to $1 billion, the newspaper reported. MMX shares closed at 2.20 reais on Wednesday.

Pimco's Bill Gross, manager of
the world's largest bond fund, said on Thursday the global
economy has become difficult to stabilize and that investors
should seek safety in shorter-dated bonds and
inflation-protected Treasuries. NEW YORK, Sept 5 In his September letter to investors, Gross said central banks' easy money policies have become less effective in generating economic stability, and that zero-bound interest rates have threatened finance and investment in the "real economy."

"Why invest in financial or real assets if bond prices could only go down, and/or stock prices could no longer be pumped up via the artificial steroids of QE?," Gross said, in reference to stimulative policies like the Federal Reserve's $85 billion in monthly purchases of Treasuries and mortgage-backed securities.

Gross added that liquidity will be "challenged" when policymakers start to tighten easy money policies and stocks may also be "at risk" when the Fed ends its bond-buying program.

The Fed's stimulus, which is being implemented in an effort to spur U.S. economic growth and keep interest rates low, has been a major source of support for stock and bond markets. The benchmark S&P 500 stock index has risen about 16 percent this year.

The release of the latest minutes of the Fed's July 30-31 meeting offered few clues on the timing of a reduction in stimulus. Four Fed presidents said in August, however, that the central bank could begin reducing its bond-buying soon.

In the letter entitled "Seventh Inning Stretch," Gross said that the end of central bank stimulus challenges liquidity since mutual funds and exchange-traded funds, no longer benefiting from easy money policies, will "have only themselves to sell to."

Gross also said that, in light of economic instability and central banks' focus on "forward guidance," or the likely path of future interest rates, shorter-dated bonds are the most reliable investment. The Fed has held the benchmark federal funds rate in a zero to 0.25 percent range since December 2008.

"If unemployment and inflation rates can be at least closely guesstimated, then front-end yields become the most reliable bet in the ballpark," Gross said in the letter.

Fifteen of the Fed's 19 policymakers in June had not expected to start raising rates until 2015 or later. Gross, however, wrote on social media platform Twitter in mid-July that the fed funds rate - the U.S. central bank's benchmark short-term borrowing rate - is likely to remain at its current level until 2016 and is the "key to value."

Gross, whose flagship Pimco Total Return Fund is the world's largest bond fund with $251 billion in assets, said investors should seek shorter-dated Treasuries or credit, while also seeking longer-dated TIPS to protect against future inflation.

"Bond investors should focus on 'safer' front-end positions in Treasuries or credit space because of the Fed's shift to forward guidance," Gross said.

Assets in Gross's flagship bond fund have shrunk 14 percent in the past four months as a result of investor withdrawals and price losses, according to data from investment research firm Morningstar.

The fund has seen its assets fall from $292 billion at the end of April to $251 billion at the end of August. Investors have pulled about $26 billion from the fund since the start of May, while portfolio losses have amounted to roughly $15 billion over that period, according to Morningstar.

The price losses have come amid a selloff in the bond market on fears of an upward spike in interest rates once the Fed reduces its bond-buying.

On Thursday, the yield on the safe-haven 10-year U.S. Treasury note rose above 2.95 percent, its highest in more than 25 months. As yields rise, prices fall. That marks a sharp rise of well over a percentage point since May 2, when the yield stood at 1.62 percent.

Gross's big bet on U.S. government securities has hit his flagship bond fund, which is down 4.13 percent so far this year, according to the Pimco website. The fund had 39 percent of its holdings in U.S. government-related securities as of July 31.

The fund fell 1.07 percent in August alone, putting its performance above just 8 percent of peers, according to Morningstar.

The Pimco Total Return Exchange-Traded Fund, an actively-managed ETF designed to mimic the strategy of the flagship mutual fund, fell 0.68 percent in August, ahead of 24 percent of peers, Morningstar added.

Along with the limitations of banks and government in stabilizing the economy, Gross said in the letter that regulatory restraints such as Basel III, Securities and Exchange Commission fines, and criminal investigations have been negative for the economy.

The Basel III accord was drawn up to make banks more stable and reduce their risk after the 2007-09 financial crisis.

Gross is a founder and co-chief investment officer at Pacific Investment Management Co, a unit of European financial services company Allianz SE.

The Newport Beach, California-based firm had $1.97 trillion in assets as of June 30, according to the company website.

NEW YORK, Sept 5 (Reuters) - Pimco's Bill Gross, manager of the world's largest bond fund, said on Thursday the global economy has become difficult to stabilize and that investors should seek safety in shorter-dated bonds and inflation-protected Treasuries.

In his September letter to investors, Gross said central banks' easy money policies have become less effective in generating economic stability, and that zero-bound interest rates have threatened finance and investment in the "real economy."

"Why invest in financial or real assets if bond prices could only go down, and/or stock prices could no longer be pumped up via the artificial steroids of QE?," Gross said, in reference to stimulative policies like the Federal Reserve's $85 billion in monthly purchases of Treasuries and mortgage-backed securities.

Gross added that liquidity will be "challenged" when policymakers start to tighten easy money policies and stocks may also be "at risk" when the Fed ends its bond-buying program.

The Fed's stimulus, which is being implemented in an effort to spur U.S. economic growth and keep interest rates low, has been a major source of support for stock and bond markets. The benchmark S&P 500 stock index has risen about 16 percent this year.

The release of the latest minutes of the Fed's July 30-31 meeting offered few clues on the timing of a reduction in stimulus. Four Fed presidents said in August, however, that the central bank could begin reducing its bond-buying soon.

In the letter entitled "Seventh Inning Stretch," Gross said that the end of central bank stimulus challenges liquidity since mutual funds and exchange-traded funds, no longer benefiting from easy money policies, will "have only themselves to sell to."

Gross also said that, in light of economic instability and central banks' focus on "forward guidance," or the likely path of future interest rates, shorter-dated bonds are the most reliable investment. The Fed has held the benchmark federal funds rate in a zero to 0.25 percent range since December 2008.

"If unemployment and inflation rates can be at least closely guesstimated, then front-end yields become the most reliable bet in the ballpark," Gross said in the letter.

Fifteen of the Fed's 19 policymakers in June had not expected to start raising rates until 2015 or later. Gross, however, wrote on social media platform Twitter in mid-July that the fed funds rate - the U.S. central bank's benchmark short-term borrowing rate - is likely to remain at its current level until 2016 and is the "key to value."

Gross, whose flagship Pimco Total Return Fund is the world's largest bond fund with $251 billion in assets, said investors should seek shorter-dated Treasuries or credit, while also seeking longer-dated TIPS to protect against future inflation.

"Bond investors should focus on 'safer' front-end positions in Treasuries or credit space because of the Fed's shift to forward guidance," Gross said.

Assets in Gross's flagship bond fund have shrunk 14 percent in the past four months as a result of investor withdrawals and price losses, according to data from investment research firm Morningstar.

The fund has seen its assets fall from $292 billion at the end of April to $251 billion at the end of August. Investors have pulled about $26 billion from the fund since the start of May, while portfolio losses have amounted to roughly $15 billion over that period, according to Morningstar.

The price losses have come amid a selloff in the bond market on fears of an upward spike in interest rates once the Fed reduces its bond-buying.

On Thursday, the yield on the safe-haven 10-year U.S. Treasury note rose above 2.95 percent, its highest in more than 25 months. As yields rise, prices fall. That marks a sharp rise of well over a percentage point since May 2, when the yield stood at 1.62 percent.

Gross's big bet on U.S. government securities has hit his flagship bond fund, which is down 4.13 percent so far this year, according to the Pimco website. The fund had 39 percent of its holdings in U.S. government-related securities as of July 31.

The fund fell 1.07 percent in August alone, putting its performance above just 8 percent of peers, according to Morningstar.

The Pimco Total Return Exchange-Traded Fund, an actively-managed ETF designed to mimic the strategy of the flagship mutual fund, fell 0.68 percent in August, ahead of 24 percent of peers, Morningstar added.

Along with the limitations of banks and government in stabilizing the economy, Gross said in the letter that regulatory restraints such as Basel III, Securities and Exchange Commission fines, and criminal investigations have been negative for the economy.

The Basel III accord was drawn up to make banks more stable and reduce their risk after the 2007-09 financial crisis.

Gross is a founder and co-chief investment officer at Pacific Investment Management Co, a unit of European financial services company Allianz SE.

The Newport Beach, California-based firm had $1.97 trillion in assets as of June 30, according to the company website.

Don't bet on baseball games. Bookies take too much, plus it's boring!

They say that reality is whatever you wish it to be and I suppose that could be true. Just wish it, as Jiminy Cricket used to say, and it will come true. Reality's relativity came to mind the other day as I was opening a box of Cracker Jacks for an afternoon snack. That's right – I said Cracker Jacks! I can't count the number of people who have told me during the seventh inning stretch at a baseball game to make sure I sing Cracker Jack (without the S) because that's what the song says. I care not. No one ever says buy me some “potato chip” or some “peanut.” How about a burger and some “french fry?” In all cases, the “s” just makes it flow better. My reality is a box of Cracker Jacks, and I think little sailor Jack on the outside of the box would be nodding his approval if he could ever come to life, which maybe he can if the stars are aligned and reality is whatever we wish it to be. ...

Pimco's Bill Gross sees an increasingly constrained investing environment, where the unwinding of central bank stimulus is creating an "unstable field" of choices.

In his most recent letter to investors, the managing director of the Newport Beach, Calif. bond giant—$1.97 trillion under management—combines a baseball metaphor with the observations of economist Hyman Minsky to demonstrate just how skewed things have become.

He urges investors to follow the Fed's lead on the near-end of the yield curve, and to beware of inflation.—

Minsky, he observes, would have approved of using the and deficit spending to goose the post-financial crisis moribund economy.

How far that's gone, though, might have produced a different reaction: (Read more: What perhaps Minsky couldn't conceive of was the point at which debt, deficits and interest rates would go to such extremes that the creation of credit itself, which was and remains the heart of capitalism, would be threatened. No longer might the seventh inning stretch lead to a Coke, some "Cracker Jacks" and the resumption of the old ballgame. Instead, zero-bound interest rates and debt/GDP ratios in a majority of capitalistic economies would begin to threaten, not heal, the nature of finance and investment in the real economy.

The resulting fallout hasn't been pretty as investors contemplate a less potent central bank:

In short, and in too-abbreviated summation, debt-laden economies with near-zero-bound interest rates became victims of their own excess, a condition that was more difficult to stabilize cyclically because Big Government and Big Bank had reached limits, and private market investors with huge portfolios of their own began to leave the ballpark early. Why stick around if your team is down by seven runs with only a few innings left? Why invest in financial or real assets if bond prices could only go down, and/or stock prices could no longer be pumped up via the artificial steroids of QE?

The Fed is widely expected to shift its efforts from $85 billion worth of bond buying known as quantitative easing, coupled with a near-zero policy interest rate, to "forward guidance," or verbal dictates that look into the future for where the Fed will push rates.

Investors, then, are left to simply play the central bank game.

Gross urges investors to begin guarding against the inflation likely to come with the unwinding of QE by buying Treasury Inflation Protected Securities, or TIPS. (Read more: ) Other than that, he said fixed income should be focused at the front end of the curve, which is where the Fed will be concentrating its efforts.

For those of you who are still fans of the old American pastime – in this case capitalism and the making of money as opposed to baseball – how do you play on this rather unstable field of our own making? Which pitch do you swing at? Well, commonsensically, in an unstable global economy that is increasingly difficult to stabilize, an investor should seek out the most stable of assets.

Stocks, he said, "might be at risk" as the S&P 500 already has catapulted nearly 150 percent since the 2009 lows.

Indeed, the analysis from Gross points up the hazards of a post-QE world, where the Fed has gone where none of its predecessors dared to tread.

Improving economic data is forcing the Fed to pull back the stimulus on which the bond and equity markets have depended, and investors must now try to anticipate what wreckage will be left behind, and what opportunity lies ahead. (Read more: ) For his own tastes, Gross wants Pete Rose in the Hall of Fame, and for investors to prepare to hit a curveball.

Baseball's old saw pleads to "buy me some peanuts and Cracker Jack, I don't care if I never get back." Jack or Jacks aside, getting back to the old normal Minsky world of stabilization via Big Government and Big Bank is now being challenged, as are the investment choices and future returns dependent on them. Grab for the prize at Jack's bottom if you will, but the safer and perhaps most rewarding treat lies at the top with those front-end yields and inflation-protected securities based on our evolving age of central bank "forward guidance." I have a hunch that even Pete Rose would bet on this one.

Bill Gross, the manager of the world's biggest fund, is focusing on short-term securities as central banks take more steps to outline their future plans to the markets.

In his latest note to investors, the manager of the $268bn Pimco Total Return Bond fund takes the ‘commonsense' view that only the most stable assets such be attractive in “an unstable global economy that is increasingly difficult to stabilise”.

“At the extreme, that would be cash in the world's most stable currency. But whether dollars, euros, or pounds be your first choice (ours being dollars), cash or overnight deposits in any of them yield next to nothing,” he says.

“So say you want something but don't want to lose your money either. More concerned about the return of your money than on your money but still a little greedy (or perhaps just needy) too. Well, some say stocks – the only game in town. But I don't know. When the Fed stops the QE game, it seems that stocks might be at risk. After all, haven't they more than doubled in price since 2009 in part because of it?”

Gross instead argues that short-term bonds - or “the asset that will soon be the nearly sole focus of central banks” - could be the safest investment opportunities. This is because the increasing use of forward guidance by central banks allows financial markets and real economies to plan several years ahead.

“If unemployment and inflation rates can be at least closely guesstimated, then front-end yields become the most reliable bet in the ballpark,” he says. ”While low, they can at least form the basis for curve rolldown and volatility strategies that have higher return/risk ratios than alternative carry options such as duration, credit or currency.”� To receive more relevant articles like this one, why not sign up to our briefings and breaking alerts by clicking here and Follow @fundweb

Treasuries dropped, pushing 10-year yields to the highest in more than two years, on bets economic data will show the U.S. is recovering fast enough for the Federal Reserve to start reducing its monetary stimulus.

The 10-year term premium signaled that the securities are the cheapest since 2011. A Labor Department report today will show the number of workers claiming unemployment benefits declined last week, before a release tomorrow that will say employers added more workers in August, according to Bloomberg surveys of economists.

“We've had a strong move to the upside” in yields, said Karsten Linowsky, a fixed-income strategist at Credit Suisse Group AG in Zurich. “Everyone is waiting for these events, like the payrolls and the Fed meeting, and that's why we've seen pressure to the upside in yields.”

Benchmark 10-year yields rose four basis points, or 0.04 percentage point, to 2.94 percent at 7:01 a.m. New York time, the most since July 29, 2011, according to Bloomberg Bond Trader data. The 2.5 percent note due in August 2023 fell 10/32, or $3.13 per $1,000 face amount, to 96 8/32.

Yields have surpassed analysts' year-end weighted average forecast of 2.78 percent. They see it rising to 3.06 percent by mid-2014. The rate will end the year around current levels, Linowsky said.

Five-year (USGG5YR) yields increased as much as six basis points to 1.81 percent, the most since July 1, 2011.

Modest Expansion

Manufacturing expanded “modestly” and consumers spent more on travel and tourism from early July through late August, the Fed said in its Beige Book business survey yesterday before policy makers meet on Sept. 17-18.

The central bank is buying $45 billion of Treasuries and $40 billion in mortgage bonds each month to support the economy by putting downward pressure on borrowing costs. A Bloomberg News survey of economists taken on Aug. 9-13 showed 65 percent of them expected a reduction in September.

“It is likely that the Fed will start tapering” this month, said Mohamed El-Erian, the co-chief investment officer at Pacific Investment Management Co., which is based in Newport Beach, California.

“It is likely that this will focus on Treasuries. It is likely that this will be accompanied by lots of qualifications that stress that the Fed could reverse its decision if the economy weakens,” he said yesterday on the “Bloomberg Surveillance” radio program with Tom Keene and Michael McKee.

Pimco runs the $251 billion Total Return Fund (PTTRX), which has fallen 2.2 percent in the past year. The returns rank in the middle of its peer group, according to data compiled by Bloomberg.

Term Premium

The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, was at 0.60 percent, the most since May 12, 2011. A positive reading indicates that investors are getting yields that are above what is considered fair value.

Three-month implied volatility on U.S. 10-year interest-rate swaps climbed to 116.84 basis points yesterday, the highest since July 9, according to data compiled by Bloomberg. The average over the past year is 79.30. The gauge is a measure of projected yield fluctuations over the next 90 days.

The number of initial jobless claims in the U.S. fell to 330,000 in the week through Aug. 31 from 331,000, according to the median prediction of 50 economists surveyed by Bloomberg. Payrolls climbed by 180,000 in August, adding to a jump of 162,000 in July, according to another survey of economists before the Labor Department releases the data tomorrow.

NEW YORK (Reuters) - Pimco's Bill Gross, manager of the world's largest bond fund, said on Thursday that the global economy has become difficult to stabilize and that investors should seek safety in shorter-dated bonds and inflation-protected Treasuries.

In his September letter to investors, Gross said that central banks' easy money policies have become less effective in generating economic stability, and that zero-bound interest rates have threatened finance and investment in the "real economy.

"Why invest in financial or real assets if bond prices could only go down, and/or stock prices could no longer be pumped up via the artificial steroids of QE?," Gross said, in reference to stimulative policies like the Federal Reserve's $85 billion in monthly purchases of Treasuries and agency mortgages.

Gross added that liquidity will be "challenged" when policymakers begin to conclude their easy money policies and that stocks may also be "at risk" when the Fed ends its bond-buying program.

In light of economic instability and central banks' focus on "forward guidance," or the likely path of future interest rates, shorter-dated bonds are the most reliable investment, Gross said. The Fed has held the federal funds rate in a zero to 0.25 percent range since December 2008.

"If unemployment and inflation rates can be at least closely guesstimated, then front-end yields become the most reliable bet in the ballpark," Gross said in the letter, entitled "Seventh Inning Stretch."

Gross, whose flagship Pimco Total Return Fund is the world's largest bond fund with $251 billion in assets, added that investors should seek shorter-dated Treasuries or credit, while also seeking longer-dated TIPS to protect against future inflation.

Gross is a founder and co-chief investment officer at Pacific Investment Management Co, a unit of European financial services company Allianz SE. The firm had $1.97 trillion in assets as of June 30, according to the company website.

Pimco exec says such investments will be bolstered by the Federal Reserve's intent to keep benchmark lending rates at almost zero.

(Bloomberg) -- Pacific Investment Management Co.'s Bill Gross, manager of the world's biggest bond fund, said investors should buy short-term Treasuries and credit securities that will be bolstered by the

Federal Reserve's intent to keep benchmark lending rates at almost zero.

“The safest pitch to swing at may not be stocks, but the asset that will soon be the nearly sole focus of central banks,” Gross wrote in his monthly investment outlook posted on Newport Beach, California-based

Pimco's website today. “Instead of QE, central bankers are shifting to forward guidance, which if reliable, allows financial markets and real economies to plan several years forward in terms of financing rates and investment returns.”

Gross's Pimco Total Return Fund has dropped more than $41 billion, or 14 percent of its assets, during the past four months through losses and investor withdrawals. The fund suffered $7.7 billion in net redemptions in August, Chicago- based researcher

Morningstar Inc. said yesterday in an e-mailed statement, the fourth straight month of withdrawals and the second highest amount this year.

In December, Chairman Ben S. Bernanke moved the Fed further into uncharted policy territory in combating joblessness by tying the bank's interest-rate outlook to unemployment and inflation, known as their forward-guidance policy. Policy makers at the Fed, which are buying $85 billion in mortgage and Treasuries in its most recent quantitative easing program, have focused more at recent policy meeting on forward guidance in part to assure financial markets that policy will remain accommodating for many years, even as it may scale back bond buying.

Fed Policy

The Fed is likely to reduce its monthly purchases as soon as this month's policy meeting, according to a Bloomberg survey taken last month. The central bank's target rate has been set in a range of zero to 0.25 percent since December 2008.

“If unemployment and inflation rates can be at least closely guesstimated, then front-end yields become the most reliable bet in the ballpark,” Gross wrote. “While, low, they can at least form the basis for curve rolldown and volatility strategies that have higher return/risk ratios than alternative carry options, such as duration, credit or currency.”

Central bankers last year for the first time linked their interest-rate outlook to economic thresholds, saying rates will stay low “at least as long” as unemployment remains above 6.5 percent and if the Fed projects inflation of no more than 2.5 percent one or two years in the future. Fed officials don't see joblessness falling near that goal until 2015.

Growth Watch

The Federal Open Market Committee is debating whether growth is sufficient to fuel steady improvement in the job market and warrant tapering the Fed's monthly bond buying. Speculation the FOMC will dial down purchases at its Sept. 17-18 meeting has roiled financial markets, pushing up U.S. bond yields and contributing to the worst rout in the currencies of developing nations in five years.

Gross also recommended investors buy Treasury Inflation Protected Securities, known as TIPS, as a hedge against the risk that expansionary government and monetary policy could eventually spark inflation.

The performance of the $251 billion Total Return Fund puts it behind 51 percent of similarly managed funds through during the past year, falling 2.2 percent, according to data compiled by Bloomberg.

, a unit of the Munich-based insurer Allianz SE, managed $1.97 trillion in assets as of June 30.

Gross chooses baseball for his September theme, pitching right into an argument that “Cracker Jack” should end with an “s” and an Andy Rooney-inspired curmudgeonly rant about why baseball is “the most boring game in the world next to cricket,” citing a survey showing an average 2-hour, 39-minute game produces just 5 minutes 13 seconds of actual action, all while opening a 2,242-word investment outlook piece with 629 words having nothing to do with bonds or markets.

Cutting to the chase, Gross resumes his ongoing critique of easy-money central-bank policies:

[D]ebt-laden economies with near-zero-bound interest rates became victims of their own excess, a condition that was more difficult to stabilize cyclically because Big Government and Big Bank had reached limits, and private market investors with huge portfolios of their own began to leave the ballpark early. Why stick around if your team is down by seven runs with only a few innings left? Why invest in financial or real assets if bond prices could only go down, and/or stock prices could no longer be pumped up via the artificial steroids of QE?

The rush for the exits seems to have been hastened recently not only by the increasingly obvious limitations of Big Government and Big Bank but by the additional knock-on effects of Big Investor and Big Regulation.

Investing-wise, Gross says the surest thing out there right now is the Federal Reserve's forward guidance on interest rates, and suggests some ways to play that:

[I]n an unstable global economy that is increasingly difficult to stabilize, an investor should seek out the most stable of assets. At the extreme, that would be cash in the world's most stable currency…. Without Big Government deficits and Big Bank check writing and with the advancing risks posed by Big Regulation and the technical whimsy of Big Investor, the safest pitch to swing at may not be stocks but the asset that will soon be the nearly sole focus of central banks. Instead of QE, central bankers are shifting to “forward guidance” which, if reliable, allows financial markets and real economies to plan several years forward in terms of financing rates and investment returns. If unemployment and inflation rates can be at least closely guesstimated, then front-end yields become the most reliable bet in the ballpark, Pete Rose notwithstanding. While low, they can at least form the basis for curve rolldown and volatility strategies that have higher return/risk ratios than alternative carry options such as duration, credit or currency….

Grab for the prize at [Cracker] Jack's bottom if you will, but the safer and perhaps most rewarding treat lies at the top with those front-end yields and inflation-protected securities based on our evolving age of central bank “forward guidance.” I have a hunch that even Pete Rose would bet on this one.

In his latest monthly missive, the Pimco chief recommends short-term debt and inflation-protected securities. He also gleefully bashes baseball.

They say that reality is whatever you wish it to be and I suppose that could be true. Just wish it, as Jiminy Cricket used to say, and it will come true. Reality's relativity came to mind the other day ...

Total Return exchange-traded fund eclipsed by Pimco's Enhanced Short Maturity offering

When Bill Gross announced the launch of the exchange-traded version of the

Pimco Total Return Fund, he had his sights set on it becoming the biggest ETF in the world.

Thanks to interest rate blues, it isn't even the biggest ETF at his company now.

This week the $4.09 billion Pimco Enhanced Short Maturity ETF (MINT), an ultrashort-bond ETF, surpassed the $4.06 billion Pimco Total Return ETF (BOND) to become the biggest actively managed ETF as investors clamor for the safety of bonds less sensitive to rising long-term interest rates.

Before the Total Return ETF's March 2012 launch, Mr. Gross had predicted that it would grow to be bigger than the then $95 billion SPDR S&P 500 ETF (SPY), the largest ETF.

“We're working with very large expectations here,”

Of course, that was before rising rates started causing headaches across the bond universe.

Since long-term rates began to rise in May, investors have pulled out $858 million from the Total Return ETF and added $1.4 billion to the Enhanced Short Maturity ETF, according to IndexUniverse LLC.

“With massively rising interest rates, even a good bond manager is going to have trouble creating positive performance in this environment,” said Timothy Strauts, an analyst at

The Pimco Total Return ETF has lost 3.23% this year. Over the same time period, the Enhanced Short Duration ETF is basically flat.

With the 10-year Treasury bond's interest rate hovering near 3%, Mr. Gross himself is advocating shorter bond durations.

“If unemployment and inflation rates can be at least closely guesstimated, then front-end yields become the most reliable bet in the ballpark,”

The $800-plus million that has been pulled from the Total Return ETF is just a drop in the bucket compared with the $26 billion that investors have pulled from the Pimco Total Return mutual fund (PTTAX) since May, according to Morningstar.

Between the outflows and losses from rising rates,

the $251 billion mutual fund has shed $41 billion, or 14% of its assets, over the past four months.

NEW YORK (MarketWatch) — Treasury prices tumbled on Thursday as the benchmark 10-year note yield pushed past 3%, a psychological threshold emblematic of its sharp climb since early May.

The 10-year note /quotes/zigman/4868283/delayed 10_YEAR -0.13%  yield, which moves inversely to price, climbed as high at 3.005% in late trade, according to FactSet. It last changed hands at 2.997%, up 9.5 basis points on the day, and its highest closing level July of 2011.

The 5-year note /quotes/zigman/4868109/delayed 5_YEAR -0.27% , along with the middle portion of the yield curve, has been selling off the hardest in recent days. The yield climbed 10.5 basis points to 1.853%, its highest level since May 2011.

The shorter end of the curve also rose more than it usually does, considering the Federal Reserve's commitment to keeping short-term interest rates low. The 2-year note /quotes/zigman/4868354/delayed 2_YEAR 0.00%  yield rose 4.5 basis points to 0.522%.

The 30-year bond /quotes/zigman/4868063/delayed 30_YEAR -0.05%  yield rose 8.5 basis points to 3.885%.

The four-month selloff in bonds picked up this week, with foreign central banks leading the way, said Thomas di Galoma, co-head of fixed-income rates trading at ED&F Man Capital Markets.

Federal Reserve indications that it will back away from its current monetary stimulus policies have sent shudders through emerging markets that threaten to hit Treasurys in a self-reinforcing cycle.

“I don't think there's anything magical about 3%, mainly because the central banks have been selling Treasurys as a defense mechanism because their currencies are weak,” di Galoma said.

Treasurys were weaker going into the U.S. trading day, but continued to slide after mostly positive economic news.

An ADP report showed private-sector employment growth slowed to 176,000 in August, below consensus expectations of 185,000, and lower than July's revised gain of 198,000. Weekly jobless claims, however, dropped to their lowest level since October 2007 last week, with the number of people applying for unemployment benefits down by 9,000 from the prior week to 323,000.

The labor data serve as a warm-up of sorts for what may turn out to be a pivotal Friday jobs report, in which economists polled by MarketWatch expect nonfarm-payroll gains of 170,000. That may play into the Federal Reserve's decision on whether it will begin curbing its $85 billion in monthly bond buys. But the predictive power of the ADP report is mixed at best, strategists say.

“There's been a decent amount of variation between ADP and the nonfarm payroll number,” said Robert Tipp, chief investment strategist at Prudential Fixed Income. “Over time, it's a pretty unbiased nonfarm predictor, but at any time it could be plus or minus 50,000.”

Data on Thursday also showed revised U.S. second-quarter productivity jumped 2.3%, above the prior read of 0.9%, and economist expectations of 1.9%.

An ISM survey of purchasing managers climbed at its fastest pace on record in August, jumping to 58.6% from 56.0% in July.

Given the recent selloff on the back of uncertain Fed monetary policy, Pimco's Bill Gross said in a letter to investors Thursday that investors should .

While the market largely expects the Fed to announce initial actions to begin winding down its stimulus this month, officials have said the decision hinges upon improvement in economic data.

Meanwhile, the Bank of England and European Central Bank both held their policy rates steady. The ECB upgraded its projections for gross domestic product in 2013 to negative 0.4% from negative 0.6%. However, ECB President Mario Draghi acknowledged downside risks to the European economy. Read a recap of the ECB press conference.

Government bonds sold off across Europe alongside Treasurys. The 10-year German bond, or bund, /quotes/zigman/15866409 BX:TMBMKDE-10Y +5.16%  yield was up 11 basis points to 2.045%, breaching 2% for the first time in 17 months.

The United Kingdom's 10-year bond, or gilt /quotes/zigman/15866328 BX:TMBMKGB-10Y +4.76%  , yield was up 13.5 basis points at 3.011%, its first time above 3% since July 2011.

Ben Eisen is a MarketWatch reporter based in New York.

NEW YORK (MarketWatch) -- Treasury prices tumbled on Thursday as the benchmark 10-year note yield pushed to the brink of 3%, a psychological threshold emblematic of its sharp climb since early May.

The 10-year note (10_YEAR) yield, which moves inversely to price, closed near its highest point of the day, up 8.5 basis points at 2.987%, its highest level July of 2011.

The 5-year note (5_YEAR), along with the middle portion of the yield curve, has been selling off the hardest in recent days. The yield climbed 9.5 basis points to 1.844%, its highest level since May 2011.

The shorter end of the curve also rose more than it usually does, considering the Federal Reserve's commitment to keeping short-term interest rates low. The 2-year note (2_YEAR) yield rose 4 basis points to 0.518%.

The 30-year bond (30_YEAR) yield rose 8.5 basis points to 3.885%.

The four-month selloff in bonds picked up this week, with foreign central banks leading the way, said Thomas di Galoma, co-head of fixed-income rates trading at ED&F Man Capital Markets.

Federal Reserve indications that it will back away from its current monetary stimulus policies have sent shudders through emerging markets that threaten to hit Treasurys in a self-reinforcing cycle.

"I don't think there's anything magical about 3%, mainly because the central banks have been selling Treasurys as a defense mechanism because their currencies are weak," di Galoma said.

Treasurys were weaker going into the U.S. trading day, but continued to slide after mostly positive economic news.

An ADP report showed private-sector employment growth slowed to 176,000 in August, below consensus expectations of 185,000, and lower than July's revised gain of 198,000. Weekly jobless claims, however, dropped to their lowest level since October 2007 last week, with the number of people applying for unemployment benefits down by 9,000 from the prior week to 323,000.

The labor data serve as a warm-up of sorts for what may turn out to be a pivotal Friday jobs report, in which economists polled by MarketWatch expect nonfarm-payroll gains of 170,000. That may play into the Federal Reserve's decision on whether it will begin curbing its $85 billion in monthly bond buys. But the predictive power of the ADP report is mixed at best, strategists say.

"There's been a decent amount of variation between ADP and the nonfarm payroll number," said Robert Tipp, chief investment strategist at Prudential Fixed Income. "Over time, it's a pretty unbiased nonfarm predictor, but at any time it could be plus or minus 50,000."

Data on Thursday also showed revised U.S. second-quarter productivity jumped 2.3%, above the prior read of 0.9%, and economist expectations of 1.9%.

An ISM survey of purchasing managers climbed at its fastest pace on record in August, jumping to 58.6% from 56.0% in July.

Given the recent selloff on the back of uncertain Fed monetary policy, Pimco's Bill Gross said in a letter to investors Thursday that investors should buy short-maturity bonds.

While the market largely expects the Fed to announce initial actions to begin winding down its stimulus this month, officials have said the decision hinges upon improvement in economic data.

Meanwhile, the Bank of England and European Central Bank both held their policy rates steady. The ECB upgraded its projections for gross domestic product in 2013 to negative 0.4% from negative 0.6%. However, ECB President Mario Draghi acknowledged downside risks to the European economy. Read a recap of the ECB press conference.

Government bonds sold off across Europe alongside Treasurys. The 10-year German bond, or bund, yield was up 11 basis points to 2.045%, breaching 2% for the first time in 17 months.

The United Kingdom's 10-year bond, or gilt , yield was up 13.5 basis points at 3.011%, its first time above 3% since July 2011.

CalPERS is changing the fund lineup for its Supplemental Income Plans to all passive funds managed by State Street Global Advisors and in-house staff, effective Oct. 7, confirmed spokesman Joe DeAnda.

The total fund lineup drops to 16 from 24 funds. The number includes 10 target-date fund s managed internally by staff of the $260.9 billion California Public Employees' Retirement System, Sacramento, and externally by SSgA. The six index funds will be managed by SSgA.

The changes are effective Oct. 7 following a quiet period that begins Oct. 2, according to a newsletter on the SIP website. The SIP consists of four plans totaling $1.64 billion in assets, including the $1.1 billion 457 plan.

The new SSgA index funds are a U.S. government short-term investment fund, a U.S. short-term government/credit bond fund, real asset fund, U.S. bond fund, Russell all-cap domestic equity fund and all-cap ex-U.S. equity fund.

Active options that are being eliminated are U.S. smidcap equity value and growth options managed by The Boston Co.; international equity managed by Pyramis Global Advisors; short-term bond managed by Pacific Investment Management Co.; and five other options managed internally.

Investment consultant R.V. Kuhns & Associates assisted.

— Contact Rob Kozlowski at rkozlowski@pionline.com | @Kozlowski_PI

In a new legal challenge, financial industry opponents of the city of Richmond's plan to seize underwater home loans call the gambit a disguised attempt to profit at the expense of everyday investors.

Richmond is threatening to use eminent domain to remove troubled loans from mortgage bonds in order to write down the principal for homeowners. The novel plan, promoted by San Francisco investment firm Mortgage Resolution Partners, seeks to stop another wave of foreclosures in the working-class Northern California city.

The plan has drawn fierce opposition from the financial industry, which has banded together in a lawsuit challenging the city's authority. In a new filing late Thursday, the plaintiffs accused the city and Mortgage Resolution Partners of cherry-picking the most valuable loans and forcing their sale at less than market value — so the firm can make a profit.

The effect will be to rob owners of mortgage securities across the country, the opponents contend, including everyday investors whose retirement savings are managed by some of the biggest bond funds in the nation.

"MRP is renting local government power to take money out of the pockets of savers and retirees across the U.S. and line their own pockets," said a statement from attorney John Ertman of Ropes & Gray, the lead counsel for the banks and bond house seeking to shut down the program before it takes hold and spreads to other cities.

An MRP official sharply disputed the assertions, and said the mortgage-bond investors could themselves step in and help finance the program — and share in the profits at the end, if any.

"Why don't they sit down and negotiate with the city and come to a deal that works for everybody?" said MRP Chief Strategy Officer John Vlahoplus.

Calls to the mayor's office in Richmond went unreturned Friday, and the city attorney's office said no one was available to respond. Efforts to reach attorneys at Altshuler Berzon, a San Francisco law firm representing the city, were unsuccessful.

Opponents of the eminent domain seizures contend that Richmond and its partner firm have mischaracterized the first 624 loans the city has targeted. The majority of the loans in question are either not underwater — meaning owners owe more than the homes are worth — or not delinquent.

About 31% of the targeted loans do not exceed the current value of the home, and so are not at elevated risk of default, according to the filing. About 10% of the borrowers have at least 20% equity in the homes, according to a loan-by-loan analysis performed by Phillip R. Burnaman II, an investment banker hired by the plaintiffs as an expert on mortgage securities.

Of the borrowers who are underwater, 43% are current on their loan payments, the plaintiffs argue. In all, 68% of the borrowers have not fallen behind, and an additional 5% are only one payment behind, according to the filing.

The loans had been bundled up to back mortgage bonds issued by private parties, without guarantees from Fannie Mae, Freddie Mac or other government-sponsored entities.

Proponents of the Richmond plan have argued these types of loans are rarely modified to keep owners in their homes. But the plaintiffs assert that about half of the loans have already been modified by lenders.

Further, more than half the borrowers ran up their loan balances during the housing boom by refinancing, allowing them to turn inflated home equities into cash. The loans total $53 million more than the original purchase prices of the homes, according to the filing.

Vlahoplus, of Mortgage Resolution Partners, disputed the analysis, saying he's confident that all of the 624 borrowers are indeed underwater. The city's appraisals of the properties, he said, were handled by a firm whose work has been highly rated by securities trade groups.

About two-thirds of the borrowers have indeed stayed current on their loans, he said. But helping them now — before they default — is the best way to make sure they stay current on the loans and thereby limit further damage to Richmond's battered neighborhoods.

"The intent here is to help the neighbors," he said.

The filings were made by attorneys for Wells Fargo Bank and Deutsche Bank, which act as trustees overseeing the pools of loans and provide customer service on them — collecting bills, paying investors in the mortgage pools and handling delinquencies and foreclosures.

The banks say they were directed to file the suit by huge bond-investment firms that own the mortgage-backed securities.

These firms — Pacific Investment Management Co. in Newport Beach, BlackRock Inc. of New York and DoubleLine Capital of Los Angeles — say the money comes from pension funds and 401(k) accounts, meaning ordinary workers would be the losers if cities profit at their expense.

Mortgage Resolution Partners last year pitched the eminent domain plan to San Bernardino County and two of its cities, Fontana and Ontario. That county and the two cities formed a Joint Powers Authority to consider the eminent domain idea but then shelved it after Wall Street groups voiced strong opposition and little public support was heard.

scott.reckard@latimes.com

Twitter: @scottreckard

President Barack Obama's preferred successor as the next Federal Reserve chairman, former Treasury Secretary Lawrence Summers, reportedly is facing mounting opposition.

Obama's main concern about nominating Summers has been the potential for a Senate battle — not only from Republicans, but also from Democrats who view Summers as having been too friendly toward deregulating big banks when he was Treasury secretary in the Clinton administration, The New York Times reported.

That concern about confirmation has been affirmed as bloggers and groups on the left have mobilized, either to oppose Summers or to urge Obama to pick Janet Yellen, the economist he named to be Fed vice chairwoman in 2010, to be the first female Fed chairman, the Times reported.

Editor's Note: Obama Donor Banned This Message (Shocking)

The president has interviewed Summers and Yellen for the job, as well as Donald L. Kohn, a former Fed vice chairman, aides told the Times. But administration insiders say they believe Obama remains inclined to nominate the man who, as his chief economic adviser through 2009 and 2010, helped him through the worst global financial crisis since the Depression.

Summers's edge, the insiders say, reflects that relationship and not any arguments against. Yellen, whom Obama does not know well. And they do not rule out another candidate, though no other names are known to be in the mix.

Criticism of Summers is familiar in Washington. His widely acknowledged intellect is offset by imperiousness that makes him hard to work with, some of his opponents told the Times.

"Larry is many things — he is brash, he is crass, he does not tolerate fools well, and he has to be the smartest person in the room,” one longtime official told the Times.

But Pimco CEO Mohamed El-Erian cautioned that investors don't know what Summers' policies would be. "We don't have enough information to make an assessment, just some second- and third-hand accounts," El-Erian has said.

Joann Weiner, who teaches economics at George Washington University, thinks Yellen and Summers should serve at the Fed together.

"I'd like to see Obama continue to make history by nominating Yellen, who would be the first woman to lead the Fed, as the chairman and to see him nominate Summers to take over Yellen's post and become so-called chairman-in-waiting," she wrote in The Washington Post.

Moreover, Reuters reported that a Summers-led Fed would appear less likely to extend or expand the use of the extraordinary measures that the central bank has undertaken during the tenure of current chairman Ben Bernanke, whose term expires in January.

The distinction between Summers and Yellen is perhaps best illustrated by remarks they delivered at separate events in April.

Yellen, a strong supporter of Bernanke's policies, in a speech to business editors in Washington, exhorted the Fed to keep its focus on efforts to foster a lower unemployment rate, even if it comes at a cost of stronger-than-desired inflation.

By contrast, Summers, in a separate, closed event in California later that month, raised doubts that the unemployment rate could drop all that much lower without kindling unwanted levels of inflation.

He also was skeptical about how effective the Fed's massive bond buying program, known as quantitative easing, has been in promoting economic growth.

Editor's Note: Obama Donor Banned This Message (Shocking)

© 2013 Moneynews. All rights reserved.

The Dow up 96 points yesterday. Gold down $22.

These are the opposite of what we believe to be the major new trends. Are we wrong? Or was yesterday just a mixed-up trading day?

Hold on… we'll find out later.

In the meantime, we've been pre-occupied by a looming wedding. A daughter is getting married this weekend. The father of the bride has to prepare certain formalities, a speech, a parking plan and otherwise stay out of the way.

But the distraction of connubial bliss has kept us from pursuing our campaign to become the next Fed chairman. On several days, we were out of the office. Perhaps we missed Mr Obama's phone call? Or maybe he was just too busy with preparing an act of war against a foreign country to pay much attention to the nation's monetary regime.

Who knows? For whatever reason, we didn't get the call. We have not been asked. Nor has the NSA/CIA/FBI run a background check to make sure we wouldn't cause shame or regret to the administration. They hardly need to do so. It's evident on the surface that we would be a deep embarrassment to whatever government allowed us to take a top position.

Why? Because we just don't share the core fantasy of all modern central bankers – that they can know better than all the rest of the world put together what interest rate, what employment rate and what inflation rate the country should have.

We mention the three because the Fed sets short-term rates and influences other rates by direct intervention. And it does so, it says, to change the two other rates – employment and inflation. Every candidate for the top post at the Fed – except us – believes it is his right and duty to do these things. Which means, none should be allowed anywhere near the Fed.

Bill Bonner on markets, economics & the madness of crowds

Receive Bill Bonner's free daily email 'The Daily Reckoning' straight to your inbox

And here's the bad news. It appears that our campaign is being eclipsed by Mr Larry Summers. The New York Times reports:

As Summers's odds rise, stimulus easing is seen

Businesses raising money and people buying homes and cars all have faced higher interest rates in recent months as the Fed's campaign to suppress borrowing costs has faltered. The rise in rates reflects optimism that the economy is gaining strength, and an expectation that the Fed will begin to pull back later this year. But a wide range of financial analysts also see evidence of a Summers effect.

Many investors expected that Ms. Yellen would be nominated to replace Ben S. Bernanke as head of the central bank, a choice that would have sent a clear message of continuity. Instead, investors are now trying to anticipate how Mr. Summers might change the Fed.

“People don't know what Larry might do,” said Mohamed El-Erian, chief executive of Pimco, the giant bond fund manager. “There's a lack of a lot of information on Larry's views. We don't have enough information to make an assessment, just some second- and third-hand accounts.”

We don't know what Larry might do either. But we don't want to find out.

He's a grand intervener, a meddler extraordinaire, a world improver nonpareil. He has a solution for every problem, and every solution brings even more problems. How, exactly, he would improve the world – with lower rates, or higher federal deficits, or whatever – is just a matter of current detail.

But, put this question to Mr Summers: “Will your policies make the world a better place or a worse place?”

Mr Summers, if he is an honest man, must answer, “I don't know.”

Now, ask: “Will the outcome be better or worse than if buyers and sellers are allowed to pursue their own policies?”

Again, an honest man must reply “I don't know.”

But unless we misjudge our man, Mr Summers is not an honest man. Instead, he will give you all the ‘reasons' why his policies will produce more employment or more inflation, and why this would be a better outcome than nature itself could come up with. In short, he will tell you why he is smarter than either man or gods.

This is the sort of jacked-up conceit that must make a fat target for the jealous gods. They will have their revenge. They will have the last laugh. They will make damned sure the US economy gets not what it expects, but what Mr Summers deserves.

Which is why Mr Obama would be a lot better off if he'd called us. At least we are aware that central banking is subject to the rule of declining marginal utility – just like everything else. A little of it – keeping the currency at a fixed value – may be a good thing. But as soon as the central bankers stick their nose in employment rates, inflation rates, or interest rates, the return on investment quickly sinks below zero. Then, it is all downhill to disaster.

Barack, this could be your last chance. Call 1 (800) Fed Boss. Ask for Bill.

• Don't miss Bill's next Daily Reckoning. To receive the next article straight into your inbox as soon as he's written it, sign up to the email list here.

Information in The Daily Reckoning is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Daily Reckoning is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do

Pimco's Bill Gross, manager of the world's largest bond fund, said on Thursday the global economy has become difficult to stabilize and that investors should seek safety in shorter-dated bonds and inflation-protected Treasurys.

In his September letter to investors, Gross said central banks' easy money policies have become less effective in generating economic stability, and that zero-bound interest rates have threatened finance and investment in the "real economy."

"Why invest in financial or real assets if bond prices could only go down, and/or stock prices could no longer be pumped up via the artificial steroids of QE?," Gross said, in reference to stimulative policies like the Federal Reserve's $85 billion in monthly purchases of Treasurys and mortgage-backed securities.

Editor's Note: Seniors Scoop Up Unclaimed $20,500 Checks? (See If You Qualify)

Gross added that liquidity will be "challenged" when policymakers start to tighten easy money policies and stocks may also be "at risk" when the Fed ends its bond-buying program.

The Fed's stimulus, which is being implemented in an effort to spur U.S. economic growth and keep interest rates low, has been a major source of support for stock and bond markets.

The benchmark S&P 500 stock index has risen about 16 percent this year.

The release of the latest minutes of the Fed's July 30-31 meeting offered few clues on the timing of a reduction in stimulus. Four Fed presidents said in August, however, that the central bank could begin reducing its bond-buying soon.

In the letter entitled "Seventh Inning Stretch," Gross said that the end of central bank stimulus challenges liquidity since mutual funds and exchange-traded funds, no longer benefiting from easy money policies, will "have only themselves to sell to."

Gross also said that, in light of economic instability and central banks' focus on "forward guidance," or the likely path of future interest rates, shorter-dated bonds are the most reliable investment.

The Fed has held the benchmark federal funds rate in a zero to 0.25 percent range since December 2008.

"If unemployment and inflation rates can be at least closely guesstimated, then front-end yields become the most reliable bet in the ballpark," Gross said in the letter.

Fifteen of the Fed's 19 policymakers in June had not expected to start raising rates until 2015 or later.

Gross, however, wrote on social media platform Twitter in mid-July that the fed funds rate — the U.S. central bank's benchmark short-term borrowing rate — is likely to remain at its current level until 2016 and is the "key to value."

Gross, whose flagship Pimco Total Return Fund is the world's largest bond fund with $251 billion in assets, said investors should seek shorter-dated Treasurys or credit, while also seeking longer-dated TIPS to protect against future inflation.

"Bond investors should focus on 'safer' front-end positions in Treasurys or credit space because of the Fed's shift to forward guidance," Gross said.

Assets in Gross' flagship bond fund have shrunk 14 percent in the past four months as a result of investor withdrawals and price losses, according to data from investment research firm Morningstar.

The fund has seen its assets fall from $292 billion at the end of April to $251 billion at the end of August. Investors have pulled about $26 billion from the fund since the start of May, while portfolio losses have amounted to roughly $15 billion over that period, according to Morningstar.

The price losses have come amid a selloff in the bond market on fears of an upward spike in interest rates once the Fed reduces its bond-buying.

On Thursday, the yield on the safe-haven 10-year U.S. Treasury note rose above 2.95 percent, its highest in more than 25 months. As yields rise, prices fall. That marks a sharp rise of well over a percentage point since May 2, when the yield stood at 1.62 percent.

Gross' big bet on U.S. government securities has hit his flagship bond fund, which is down 4.13 percent so far this year, according to the Pimco website. The fund had 39 percent of its holdings in U.S. government-related securities as of July 31.

The fund fell 1.07 percent in August alone, putting its performance above just 8 percent of peers, according to Morningstar.

The Pimco Total Return Exchange-Traded Fund, an actively-managed ETF designed to mimic the strategy of the flagship mutual fund, fell 0.68 percent in August, ahead of 24 percent of peers, Morningstar added.

Along with the limitations of banks and government in stabilizing the economy, Gross said in the letter that regulatory restraints such as Basel III, Securities and Exchange Commission fines, and criminal investigations have been negative for the economy.

The Basel III accord was drawn up to make banks more stable and reduce their risk after the 2007-09 financial crisis.

Gross is a founder and co-chief investment officer at Pacific Investment Management Co, a unit of European financial services company Allianz SE.

The Newport Beach, California-based firm had $1.97 trillion in assets as of June 30, according to the company website.

Editor's Note: Seniors Scoop Up Unclaimed $20,500 Checks? (See If You Qualify)

© 2013 Thomson/Reuters. All rights reserved.

Pimco's Bill Gross is an investing legend. But he's struck out with his calls about stocks. His bond fund has lagged too.

The opinions expressed in this commentary are solely those of . Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

Bill Gross, the so-called Bond King, is still very worried about what's going to happen to the financial markets once the Federal Reserve begins to slow down the pace of its asset buying program.

Gross, a co-founder of investment firm Pimco and manager of the mammoth Pimco Total Return (PTTRX) bond fund, wrote about his concerns in his latest monthly outlook.

The piece -- titled -- is chock full of (nuts?) baseball analogies. (You know you're a contrarian when you rhapsodize about baseball on the day that the National Football League is about to blitz -- pun intended -- the public conscious once again.) Gross seems to think that the stock market rally will soon end. There won't be extra innings. Unsurprisingly, Gross refers to the Fed's quantitative easing as the equivalent of hitters "juicing" to boost their home run totals.

"Why invest in financial or real assets if bond prices could only go down, and/or stock prices could no longer be pumped up via the artificial steroids of QE?" he asks.

He raises a great point. A lot of experts are worried about what will happen to the bond and stock markets once the Fed starts to trim (my moratorium on the other T-word is still in full effect!) its $85 billion a month of Treasury and mortgage-backed security purchases. But this is not new. Gross has been warning of pretty much the same risks for some time now. And while he's right that longer-term bond prices have continued to fall and rates have kept rising -- the is now a hair below 3% -- he's been wrong about stocks.

Last December, Gross listed some Pimco picks and pans. Here's what he had to say about portions of the stock market. "Non-Dollar Emerging-Market Stocks" were a pick. "Financial Stocks of Banks and Insurance Companies" were a pan.

Hmm. That's not working out too well. Check out this year-to-date chart of the iShares MSCI Emerging Markets (EEM) exchange-traded fund versus the Financial Select Sector SPDR (XLF).

Interestingly, a big reason the emerging markets have plunged (especially as of late) is because of concerns that the next moves by the Fed will lead to massive outflows of capital from these developing nations. India, Brazil and others have large current account deficits.

So while Gross is right to be worried about the Fed, he may have underestimated what impact the end of QE would have on the rest of the world. Meanwhile, bank stocks have continued to rally despite Fed fears. Investors seem to think that rates won't go so high that they will cripple recovery in the housing market. That could change.

But for now, the market seems to have faith in the Fed. The hope is that the Fed realizes the economy is still fragile, and will pull back on QE gradually.

So Gross' steroids metaphor for QE and stocks may not really be apt. The Fed is not going to completely stop juicing. It's just cutting back the dosage a bit. After all, there's no Wall Street or Beltway version of Bud Selig to suspend the Fed for a season or two. (Although .) Now don't get me wrong. Gross still has a great track record over a long period of time. But he's not a stock market expert.

Making matters worse, Gross's own fund has also lagged the performance of other bond benchmarks this year. Yes, it's been a brutal year for fixed income investors, particularly those betting on Treasuries.

But as this next chart shows, an investor would be slightly better off this year in a passively managed bond index ETF like the iShares Barclays U.S. Treasury Bond (GOVT)� than the actively managed PIMCO Total Return ETF (BOND) that is supposed to mimic the performance of Gross' mutual fund.

For what it's worth, Gross now thinks that "the safest pitch to swing at" are bonds with shorter-maturity dates. He also refers to them as "boring slow-rolling grounders." Sadly, there's no mention of a bond suicide squeeze or the intricacies of the infield fly rule in his piece.

And Gross also recommends longer-term Treasury Inflation-Protected Securities (TIPS) as a hedge against what he sees as "accelerating inflation at some future time" due to the Fed's easy money policies. But should you listen to this advice? Investors (and yes, people like me in the financial media) often make the mistake of guru-izing people and treating their every utterance as something that must be considered as an actionable trading nugget. Right now!

To be totally fair to Gross, he made light of this phenomenon in his April outlook. He opened the piece, titled after the Michael Jackson song (how meta to have the King of Bonds quoting the King of Pop), with the following question and answer:

Am I a great investor? No, not yet.

That honesty is refreshing. Gross then went on to write that "there is not a Bond King or a Stock King or an Investor Sovereign alive that can claim title to a throne" adding that the "old guys" like Warren Buffett, George Soros, Dan Fuss, and himself "cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience." So should you pay attention to Bill Gross? Yes. But take his words with many grains of salt. He'd be out of a job if he suddenly felt that certain types of bonds were no longer a good bet and that investors should flock to stocks, gold, real estate or any other asset instead.

To use another baseball analogy, Gross may be to bond investing what Babe Ruth, Ted Williams, Willie Mays and Hank Aaron are to America's pastime. He is among the greatest.

But even those Hall of Famers were only successful a little more than 30% of the time they went to bat. That sounds about right for investing legends too. Pimco's Bill Gross is an investing legend. But he's struck out with his calls about stocks. His bond fund has lagged too. The opinions expressed in this commentary are solely those of . Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks. Bill Gross, the so-called Bond King, is still very worried about what's going to happen to the financial markets once the Federal Reserve begins to slow down the pace of its asset buying program. Gross, a co-founder of investment firm Pimco and manager of the mammoth Pimco Total Return (PTTRX) bond fund, wrote about his concerns in his latest monthly outlook. The piece -- titled -- is chock full of (nuts?) baseball analogies. (You know you're a contrarian when you rhapsodize about baseball on the day that the National Football League is about to blitz -- pun intended -- the public conscious once again.) Gross seems to think that the stock market rally will soon end. There won't be extra innings. Unsurprisingly, Gross refers to the Fed's quantitative easing as the equivalent of hitters "juicing" to boost their home run totals. "Why invest in financial or real assets if bond prices could only go down, and/or stock prices could no longer be pumped up via the artificial steroids of QE?" he asks. He raises a great point. A lot of experts are worried about what will happen to the bond and stock markets once the Fed starts to trim (my moratorium on the other T-word is still in full effect!) its $85 billion a month of Treasury and mortgage-backed security purchases. But this is not new. Gross has been warning of pretty much the same risks for some time now. And while he's right that longer-term bond prices have continued to fall and rates have kept rising -- the is now a hair below 3% -- he's been wrong about stocks. Last December, Gross listed some Pimco picks and pans. Here's what he had to say about portions of the stock market. "Non-Dollar Emerging-Market Stocks" were a pick. "Financial Stocks of Banks and Insurance Companies" were a pan. Hmm. That's not working out too well. Check out this year-to-date chart of the iShares MSCI Emerging Markets (EEM) exchange-traded fund versus the Financial Select Sector SPDR (XLF). Interestingly, a big reason the emerging markets have plunged (especially as of late) is because of concerns that the next moves by the Fed will lead to massive outflows of capital from these developing nations. India, Brazil and others have large current account deficits. So while Gross is right to be worried about the Fed, he may have underestimated what impact the end of QE would have on the rest of the world. Meanwhile, bank stocks have continued to rally despite Fed fears. Investors seem to think that rates won't go so high that they will cripple recovery in the housing market. That could change. But for now, the market seems to have faith in the Fed. The hope is that the Fed realizes the economy is still fragile, and will pull back on QE gradually. So Gross' steroids metaphor for QE and stocks may not really be apt. The Fed is not going to completely stop juicing. It's just cutting back the dosage a bit. After all, there's no Wall Street or Beltway version of Bud Selig to suspend the Fed for a season or two. (Although .) Now don't get me wrong. Gross still has a great track record over a long period of time. But he's not a stock market expert. Making matters worse, Gross's own fund has also lagged the performance of other bond benchmarks this year. Yes, it's been a brutal year for fixed income investors, particularly those betting on Treasuries. But as this next chart shows, an investor would be slightly better off this year in a passively managed bond index ETF like the iShares Barclays U.S. Treasury Bond (GOVT)� than the actively managed PIMCO Total Return ETF (BOND) that is supposed to mimic the performance of Gross' mutual fund. For what it's worth, Gross now thinks that "the safest pitch to swing at" are bonds with shorter-maturity dates. He also refers to them as "boring slow-rolling grounders." Sadly, there's no mention of a bond suicide squeeze or the intricacies of the infield fly rule in his piece. And Gross also recommends longer-term Treasury Inflation-Protected Securities (TIPS) as a hedge against what he sees as "accelerating inflation at some future time" due to the Fed's easy money policies. But should you listen to this advice? Investors (and yes, people like me in the financial media) often make the mistake of guru-izing people and treating their every utterance as something that must be considered as an actionable trading nugget. Right now! To be totally fair to Gross, he made light of this phenomenon in his April outlook. He opened the piece, titled after the Michael Jackson song (how meta to have the King of Bonds quoting the King of Pop), with the following question and answer: Am I a great investor? No, not yet. That honesty is refreshing. Gross then went on to write that "there is not a Bond King or a Stock King or an Investor Sovereign alive that can claim title to a throne" adding that the "old guys" like Warren Buffett, George Soros, Dan Fuss, and himself "cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience." So should you pay attention to Bill Gross? Yes. But take his words with many grains of salt. He'd be out of a job if he suddenly felt that certain types of bonds were no longer a good bet and that investors should flock to stocks, gold, real estate or any other asset instead. To use another baseball analogy, Gross may be to bond investing what Babe Ruth, Ted Williams, Willie Mays and Hank Aaron are to America's pastime. He is among the greatest. But even those Hall of Famers were only successful a little more than 30% of the time they went to bat. That sounds about right for investing legends too. is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage. Not a member yet?

The "Bond King's" Total Return Fund is doing some serious bleeding in 2013, but how much of it rests on Bill Gross' shoulders?

The “bond king” Bill Gross needs to patch up a few holes in his palace.

Gross' flagship PIMCO Total Return Fund (PTTRX) is off more than 3% so far in 2013, and his investors are getting skittish. The fund suffered $7.7 billion in August, which follows up a $7.5 billion bleed in July and a $9.5 billion exodus in June.

Not a good trend. And things could get worse. ...

Pacific Investment Management Co.'s Bill Gross, manager of the world's biggest bond fund, said investors should buy short-term Treasuries and credit securities that will be bolstered by the Federal Reserve's intent to keep benchmark lending rates at almost zero.

“The safest pitch to swing at may not be stocks, but the asset that will soon be the nearly sole focus of central banks,” Gross wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco's website today. “Instead of QE, central bankers are shifting to forward guidance, which if reliable, allows financial markets and real economies to plan several years forward in terms of financing rates and investment returns.”

Gross's Pimco Total Return Fund has dropped more than $41 billion, or 14 percent of its assets, during the past four months through losses and investor withdrawals. The fund suffered $7.7 billion in net redemptions in August, Chicago- based researcher Morningstar Inc. said yesterday in an e-mailed statement, the fourth straight month of withdrawals and the second highest amount this year.

In December, Chairman Ben S. Bernanke moved the Fed further into uncharted policy territory in combating joblessness by tying the bank's interest-rate outlook to unemployment and inflation, known as their forward-guidance policy. Policy makers at the Fed, which are buying $85 billion in mortgage and Treasuries in its most recent quantitative easing program, have focused more at recent policy meeting on forward guidance in part to assure financial markets that policy will remain accommodative for many years, even as it may scale back bond buying.

Fed Policy

The Fed is likely to reduce its monthly purchases as soon as this month's policy meeting, according to a Bloomberg survey taken last month. The central bank's target rate has been set in a range of zero to 0.25 percent since December 2008.

“If unemployment and inflation rates can be at least closely guesstimated, then front-end yields become the most reliable bet in the ballpark,” Gross wrote. “While, low, they can at least form the basis for curve rolldown and volatility strategies that have higher return/risk ratios than alternative carry options, such as duration, credit or currency.”

Central bankers last year for the first time linked their interest-rate outlook to economic thresholds, saying rates will stay low “at least as long” as unemployment remains above 6.5 percent and if the Fed projects inflation of no more than 2.5 percent one or two years in the future. Fed officials don't see joblessness falling near that goal until 2015.

Growth Watch

The Federal Open Market Committee is debating whether growth is sufficient to fuel steady improvement in the job market and warrant tapering the Fed's monthly bond buying. Speculation the FOMC will dial down purchases at its Sept. 17-18 meeting has roiled financial markets, pushing up U.S. bond yields and contributing to the worst rout in the currencies of developing nations in five years.

Gross also recommended investors buy Treasury Inflation Protected Securities, known as TIPS, as a hedge against the risk that expansionary government and monetary policy could eventually spark inflation.

The performance of the $251 billion Total Return Fund puts it behind 51 percent of similarly managed funds through during the past year, falling 2.2 percent, according to data compiled by Bloomberg.

Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.97 trillion in assets as of June 3

The Bank of England's Monetary Policy Committee has voted to keep the base interest rate at 0.5 per cent and its programme of quantitative easing at £375bn.

Base rate has remained at current levels since March 2009, when the MPC first voted to cut rates to record-lows in a bid to help stimulate the economy. On the same day the MPC launched its programme of quantitative easing.

The quantitative easing programme was increased by £50bn to £375bn in July 2012, though the committee has voted in factions since then with some members, including former governor Mervyn King, backing a further increase to the programme.

Last month, the BoE said it would keep base rate at 0.5 per cent until the UK's unemployment rate falls below 7 per cent, or unless inflation spikes. The BoE is also prepared to add to QE while the unemployment rate remains above its desired level.

However, BoE governor Mark Carney added that the MPC will have to consider rate changes if inflation is expected to go beyond 0.5 per cent of its target in 18-24 months or if there are any threats to financial stability.

The use of forward guidance, which was widely expected by the market, follows similar action by the Bank of Japan in 1999 and the US Federal Reserve in 2012. Carney also implemented forward guidance at the Bank of Canada in 2009 when he was governor.

The BoE expects median unemployment to stand at 7.3 per cent over the next three years, the Inflation Report shows, meaning the base rate is likely to remain at its historic low throughout the forecast period.

Pimco head of sterling portfolios Mike Amey says: “By issuing no statement the MPC do not see the back up in yields as being sufficient to risk the recovery, and as such the market has continued to sell off to new yield highs. Given governor Carney's comments this suggests that the committee remains divided with the governor at the dovish end.

“Historically the MPC has paid great attention to the purchasing managers indices, and with these hitting new highs there are likely to be committee members wondering whether it will indeed take until 2016 to hit the 7 per cent unemployment threshold.”

Despite persistent large outflows from retail bond funds in 2013 there was no sign of the much-discussed exodus out of fixed income and into equities in the latest Adviser Fund Index rebalancing.

Recent figures from the IMA show £ Corporate Bond was the worst selling sector in July with net retail outflows of £131.4m, the eighth consecutive month of net outflows.

The sentiment is unsurprising following sharp rallies in the asset class in recent years that had compressed yields and threatened to force income-seeking investors either further up the risk spectrum or into alternative assets.

Moreover bond markets have endured a tumultuous time in recent months following news that the Federal Reserve hinted it could begin tapering its asset purchase programme as early as September. The news sent US Treasury yields upwards, with the rest of the market pulled up after them – wiping out most of the gains investors in the IMA £ Corporate Bond sector had enjoyed in the first few months of the year.

Such is the level of uncertainty in the market many firms have shelved plans to raise capital through debt issuance this year. With just $61bn worth of investment grade corporate debt having been issued from the start of the month, August is on track to mark the weakest month for new debt issuance since 2008, according to data from Dealogic.

Nevertheless, FE AFI panellists appear unmoved by recent volatility. Although allocation to fixed income did fall modestly in the Aggressive portfolio, it was actually increased in both the Balanced and the Cautious. This suggests panellists are somewhat more sanguine about the prospects for their fixed income holdings than the market as a whole appears to be.

“You would have thought that the biggest call at this rebalancing would have been on fixed income,” says Ben Willis, head of research at Whitechurch Securities and AFI panellist. “We're bound to hold some fixed income in our Balanced and Cautious portfolios but our focus now is on short-duration high yield and strategic bonds.”

Of course, there are potential upsides to the recent rise in fixed income yields. Firstly, yield starved investors will have an opportunity to lock in healthier looking income streams. After experiencing a prolonged period of negative real yields (below the level of CPI inflation) across the majority of the investment grade and government bond markets a small respite will be welcome.

Moreover as Toby Nangle, a multi-asset manager at Threadneedle, has pointed out, “long-dated bond yields are used to discount the present value of those pension liabilities, and these yields have been driven lower by QE”. That is, lower yields on long-dated bonds exacerbated problems for pension funds and forced them into increased purchases to plug growing liabilities. This process should now be reversing as yields on benchmark 10-year Treasuries and Gilts move upwards.

If, however, the events of recent months mark the end of the bond bull market that has persisted for the past 30 years then investors may need to be cautious about leaping back into the asset class. This view was notably expressed in May by Bill Gross, manager of the world's largest bond fund at Pimco: “The secular 30-year bull market in bonds likely ended 4/29/2013. PIMCO can help you navigate a likely lower return 2-3 per cent future.”

It is worth noting that Gross also suggested that the end of the 30-year bond bull market would end in an investment note three years previously, so it is possible that he is a little premature in his pronouncement. Nevertheless, the idea that investors face an environment of low returns for the foreseeable future ties in with those who suggest that the developed world will struggle to recapture its previous trend growth rates after the financial crisis.

Even in falling markets, however, managers that can move across the duration and risk spectrum may still be able to grind out results, says Darius McDermott, managing director of Chelsea Financial Services and an AFI panellist.

“We did reduce our bond weightings in the Balanced and Cautious portfolios but not dramatically. We have always used strategic bond funds with Jupiter, L&G Dynamic and L&G Optimal. These are managers who we would expect to protect capital and we think that they are best placed to be able to do that even during the sell-off,” he says.

To date it does not appear that panellists are moving to reflect the possibility of a “new normal” environment of low bond returns in the three benchmark AFI portfolios, but it will definitely be an area to watch in the next rebalancings.

Ricardo Moraes/ReutersEike Batista, left, with President Dilma Rousseff of Brazil, was flying high in 2012. Now his energy empire is being dismantled.

SÃO PAULO, Brazil – Brazil's securities and exchange commission said on Thursday that it had opened a new formal investigation into the business dealings of the onetime billionaire Eike Batista.

The commission, known as the CVM, is examining whether Mr. Batista and five other executives of the petroleum company OGX may have violated several articles of Brazil's corporate legislation.

Brazil's rules require management to release material information that could influence a company's share price as well as disclose information about their personal ownership stakes in the company.

In March, regulators had opened a separate inquiry into whether Mr. Batista might have violated disclosure rules.

The CVM has not revealed what specific events led to either inquiry, but OGX frequently announced major petroleum discoveries that subsequently proved to be economically unviable.

The new inquiry is the first indication that Mr. Batista or other top managers of his companies may possibly have changed their ownership stakes in an illegal manner, as the assumption has been that Mr. Batista has been hurt along with his investors.

Shares in OGX fell more than 7 percent on Thursday morning in São Paulo, trading around 38 centavos apiece, or about 16 cents.

The latest problem just adds to the woes of Mr. Batista, who was once Brazil's richest man and had vowed to become the world's richest as well.

When OGX went public in June 2008, it sold shares to investors at 1,131 reais apiece, or about $690 at the exchange rate at the time.

The company had a 100-1 share split in December 2009. But an investor who bought OGX shares at its I.P.O. price would now have lost over 96 percent of the original investment.

In recent months, Mr. Batista's other companies have seen similar collapses in their share prices, as cash flow proved insufficient to service debt and to make the extensive investments that were supposed to create an empire of energy, mining and logistics companies.

Mr. Batista's fortune, once over $30 billion, has collapsed with it, and he has sold off several assets in recent months.

In August, Mr. Batista sold a controlling stake in his logistics firm LLX to the energy investment firm EIG Global Energy Partners, based in Washington. The same month, OGX hired the Blackstone Group as a financial adviser, a possible sign that either a sale or a debt restructuring is near.

The company is producing hardly any petroleum, and it must make bond payments of about $40 million in October and $100 million in December.

The world's largest bond investment firm, Pimco, invested heavily in OGX's bonds and is leading a creditor committee that is negotiating with OGX.

Mr. Batista ostentatious lifestyle had once been popular gossip fodder. He raced speedboats, married a famous model and had dinner with Madonna. But since his fortunes have fallen, he has been forced to sell or pull back on his holdings.

Among the other assets he is seeking to sell is a luxury hotel in Rio de Janeiro, the Hotel Glória.

An attempt to sell his $19 million yacht, the Pink Fleet, failed, and Mr. Batista sent the yacht to the junkyard last month to be scrapped, presumably to save on maintenance costs.

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If I hear a man use one more cliché sports metaphor to get an investment point across, I'm going to scream. Thanks, Bill Gross.

In Bill Gross's recent investment outlook “Seventh Inning Stretch,” the PIMCO founder starts by expressing his hatred of baseball, calling it “the most boring game in the world next to cricket.” (I'll admit, I'm a fan of the old pastime.) Fair, but he then proceeds to use the game as the metaphor for his entire argument! If he hates baseball so much, why not use cricket? Or, here's a novel idea, why not ditch the cheesy sports metaphors altogether? ...

Big European CLO managers will get bigger; smaller ones will struggle to survive. That was the stark outlook for the market as described by some attendees at this week's Euromoney LevInvest European CLO Congress in London. They see the sector as ripe for another bout of consolidation, write Joe McDevitt and Hugh Leask. Jeremy Ghose at 3i Debt Management told delegates that smaller, independent CLO managers may look to exit the market as risk-retention costs begin to bite.

“The big guys will only get bigger because of the risk-retention requirements,” said Jeremy Ghose at 3i Debt Management, speaking on Monday at the Euromoney LevInvest European CLO Congress in London. “I believe we will see a wave of consolidation, similar to the one we saw a few years ago after the crisis, in the next 12-24 months.”

The European market is likely to be left with around a dozen CLO managers, Ghose estimated, while the US, which will also undergo consolidation, could be left with 25-30.

“The small independent CLO players will have two choices: they can wind down their existing CLOs and then eventually switch off the lights; or they can look for an exit and try to get paid for it,” he said.

The last phase of consolidation among managers started in 2010 and led to around $20bn of CLO assets and platforms changing hands in just over a year. The changes included US managers looking to buy European platforms, while European managers looked for US purchase opportunities to tap into the CLO market's faster recovery there.

The fewer names left in the market may offset any fall in number of new CLOs by structuring larger deals, Ghose added.

Whether the bigger names will come up with large enough offers to make consolidation happen is less certain, a major CLO investor told EuroWeek. “A lot of the past consolidations were French players dropping out, and I am not sure many of those guys are out there. The prices the big players are willing to pay right now are not that compelling,” he said.

“Rather than the smaller players being targets, I can see the more established guys appearing more interesting to a firm that's already in the market. If you want to size up, what good is it to buy just one or two more CLOs?”

European risk-retention requirements were outlined as part of the Capital Requirements Directive article 122a, which demands that originators, issuers or sponsors hold a 5% economic interest throughout the life of any securitization. In May this year, the European Banking Authority clarified in a consultation paper that the definition of sponsor included CLO managers, meaning they were not permitted to offload the risk retention to a third-party investor.

In a separate discussion on understanding the new Capital Requirements Regulations, panellists said that of the five different ways of complying with the 5% risk-retention rule, taking the vertical slice and holding the first loss tranche remain the only two feasible approaches for collateralized loan obligation managers.

David Quirolo, a partner at Ashurst, said that holding the first loss in every securitized loan in a deal — a new approach that is permitted under recent European Banking Authority amendments — would not really work for CLOs. “You're looking at either the vertical or the first loss tranche,” Quirolo told delegates.

The audience also heard how the 5% risk-retention rule was reflective of wider regulatory scrutiny administered to securitization since the financial crisis.

Steve Baker, working in structured credit at Apollo Management International, noted that asset managers were allowed to manage credit without being subject to far-reaching punitive regulations. “But if you do it through a securitization, you suddenly have lots of retention rules to deal with,” Baker told the panel, adding that securitization had been "wrongly accused of all kinds of things”.

He said that covered bonds had not faced such punitive measures, despite their ratings being linked to the ratings of banks or sovereigns, while securitizations — which are specifically not linked to banks' ratings — had been unfairly characterised.

But Christian Moor, policy adviser at the European Banking Authority, said that regulations such as the 122a risk-retention requirement and rules on transparency had been designed to restore the reputation of securitization among investors.

The panel unanimously dismissed the idea of non-compliant deals being structured and sold. Sebastien Illat, credit structurer at Barclays, said there were not enough investors willing to participate in those deals, making them too difficult to place.

Patrick Schneider, portfolio manager at Pimco, said non-compliant deals would be too illiquid for any investors that want to actively manage their portfolios. It would probably need to be an investor that wanted to hold to maturity, he added.

The other upfront cost for CLO managers is taking on the first loss piece in warehouse facilities, panellists said. Warehousing is crucial for investor confidence as the “print then sprint” model, by which managers price the debt stack and then hurriedly source assets in the secondary market, is out of favour for CLO 2.0 transactions. The less that deals need to be ramped up after pricing, the better, panellists agreed.

Structurers were now looking at ways the capital used for the first loss on the warehouse could be rolled into deal retention, they added, meaning managers would not need to stump up two chunks of capital.

With investors anticipating the end of the Federal Reserve's stimulus program, the biggest mutual fund in the world, Pimco's Total Return Fund, took a $41 billion hit over the past four months after losses and withdrawals, according to Morningstar. The $292 billion fund has shrunk to $251 billion, a reduction of 14 percent, since May, the month that Federal Reserve Chairman Ben Bernanke...

Pimco's Bill Gross, manager of the world's largest bond fund, said on Thursday the global economy has become difficult to stabilize and that investors should seek safety in shorter-dated bonds and inflation-protected Treasuries.

In his September letter to investors, Gross said central banks' easy money policies have become less effective in generating economic stability, and that zero-bound interest rates have threatened finance and investment in the “real economy.”

“Why invest in financial or real assets if bond prices could only go down, and/or stock prices could no longer be pumped up via the artificial steroids of QE?,” Gross said, in reference to stimulative policies like the Federal Reserve's $85 billion in monthly purchases of Treasuries and mortgage-backed securities.

Gross added that liquidity will be “challenged” when policymakers start to tighten easy money policies and stocks may also be “at risk” when the Fed ends its bond-buying program.

The Fed's stimulus, which is being implemented in an effort to spur U.S. economic growth and keep interest rates low, has been a major source of support for stock and bond markets. The benchmark S&P 500 stock index has risen about 16 percent this year.

The release of the latest minutes of the Fed's July 30-31 meeting offered few clues on the timing of a reduction in stimulus. Four Fed presidents said in August, however, that the central bank could begin reducing its bond-buying soon.

In the letter entitled “Seventh Inning Stretch,” Gross said that the end of central bank stimulus challenges liquidity since mutual funds and exchange-traded funds, no longer benefiting from easy money policies, will “have only themselves to sell to.”

Gross also said that, in light of economic instability and central banks' focus on “forward guidance,” or the likely path of future interest rates, shorter-dated bonds are the most reliable investment. The Fed has held the benchmark federal funds rate in a zero to 0.25 percent range since December 2008.

“If unemployment and inflation rates can be at least closely guesstimated, then front-end yields become the most reliable bet in the ballpark,” Gross said in the letter.

Fifteen of the Fed's 19 policymakers in June had not expected to start raising rates until 2015 or later. Gross, however, wrote on social media platform Twitter in mid-July that the fed funds rate – the U.S. central bank's benchmark short-term borrowing rate – is likely to remain at its current level until 2016 and is the “key to value.”

Gross, whose flagship Pimco Total Return Fund is the world's largest bond fund with $251 billion in assets, said investors should seek shorter-dated Treasuries or credit, while also seeking longer-dated TIPS to protect against future inflation.

“Bond investors should focus on ‘safer' front-end positions in Treasuries or credit space because of the Fed's shift to forward guidance,” Gross said.

Assets in Gross's flagship bond fund have shrunk 14 percent in the past four months as a result of investor withdrawals and price losses, according to data from investment research firm Morningstar.

The fund has seen its assets fall from $292 billion at the end of April to $251 billion at the end of August. Investors have pulled about $26 billion from the fund since the start of May, while portfolio losses have amounted to roughly $15 billion over that period, according to Morningstar.

The price losses have come amid a selloff in the bond market on fears of an upward spike in interest rates once the Fed reduces its bond-buying.

On Thursday, the yield on the safe-haven 10-year U.S. Treasury note rose above 2.95 percent, its highest in more than 25 months. As yields rise, prices fall. That marks a sharp rise of well over a percentage point since May 2, when the yield stood at 1.62 percent.

Gross's big bet on U.S. government securities has hit his flagship bond fund, which is down 4.13 percent so far this year, according to the Pimco website. The fund had 39 percent of its holdings in U.S. government-related securities as of July 31.

The fund fell 1.07 percent in August alone, putting its performance above just 8 percent of peers, according to Morningstar.

The Pimco Total Return Exchange-Traded Fund, an actively-managed ETF designed to mimic the strategy of the flagship mutual fund, fell 0.68 percent in August, ahead of 24 percent of peers, Morningstar added.

Along with the limitations of banks and government in stabilizing the economy, Gross said in the letter that regulatory restraints such as Basel III, Securities and Exchange Commission fines, and criminal investigations have been negative for the economy.

The Basel III accord was drawn up to make banks more stable and reduce their risk after the 2007-09 financial crisis.

Gross is a founder and co-chief investment officer at Pacific Investment Management Co, a unit of European financial services company Allianz SE.

The Newport Beach, California-based firm had $1.97 trillion in assets as of June 30, according to the company website.

PIMCO's El-Erian revisited its new normal theory. He now believes that the new normal theory is “stable disequilibrium”; that is, ”an economic and financial configuration that superficially appeared stable but was in fact increasingly unstable in its key foundations and drivers.” He pointed out five reasons behind his reasoning: Overdependence on central bnaks Highly unbalanced [...]

So is there a great rotation underway?

That could be debated every which way. But for the top retail bond funds, it sure feels like a rotation, a powerful one at that. All the big bond mutual funds, the likes of the Pimco Total Return Fund and the Doubleline Total Return Bond fund, have been suffering massive redemptions as of late. And with the market tumbling on rate concerns, these funds have been dealt a double-whammy.

Bloomberg notes that Pimco's $250 billion Total Return Fund has shed $41 billion, or 14 percent of its assets, in the past four months through losses and redemptions. The fund suffered $7.7 billion net redemptions in August, the fourth straight month of withdrawals and the second highest amount this year, according to Morningstar data.

- here's the article

There is something new and different for home mortgages: Jumbo loans are being made at lower interest rates than traditional home loans. That's kind of like a first class airplane ticket being cheaper than riding in coach.

At first this seems crazy. For as long as anybody can remember, homeowners have had to pay a premium to get jumbo loans. That's because they're not guaranteed by the federal government. If they're not guaranteed, they're riskier, so they cost more in interest payments.

"That's the old math," says Scott Simon, who for many years was one of the biggest mortgage traders in the world. "In the new world, that doesn't have to be true."

Simon, who worked for investment firm Pimco, says right now banks are making most of those jumbo loans only to the very best customers — wealthy people with perfect credit, who can put a lot of money down.

So cutting them a good deal isn't crazy.

"These are incredible borrowers and the banks want to do business with these people because they can do so much other business with them," Simon says.

Meanwhile, big banks have more cash on hand to loan out to these very best customers.

And also, the government controlled mortgage giants Fannie Mae and Freddie Mac have been ratcheting up fees they charge to guarantee those traditional loans for the rest of America. That pushes up interest rates for average people who take out those smaller traditional loans.

"I'm not sure it's a good thing or a bad thing," Simon says. "What it's gonna do is make Fannie and Freddie incredibly profitable."

That profit will flow back to the U.S. Treasury, which controls Fannie and Freddie. So Simon says it won't be long before Fannie and Freddie have handed over more money to the government than it cost taxpayers to bail them out. Please keep your community civil. All comments must follow the NPR.org Community rules and terms of use, and will be moderated prior to posting. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.

...The “Great Rotation” Into Stocks Is Deceptive Wall Street Hype

Submitted by testosteronepit.

The bond-fund massacre has been spectacular. Prime example: antsy investors yanked $7.7 billion in August out of the largest bond fund in the world, Pimco's Total Return Fund. In July, they'd yanked out $7.5 billion, in June a record $14.5 billion. From May 1 through August 31, the fund's assets shriveled 14%, from $292 billion to $251 billion; $26 billion from outflows and $15 billion from the shrinking value of the bonds. The fund lost 5.5% during that period.

By riding up the greatest bond bubble in the history of mankind, the fund has become known as a place where investors who don't mind smaller returns but shudder at the thought of losing some of their principal could park their money without having to worry about it – but now, they're worrying about it.

September is shaping up to be even worse. Bonds are cratering and yields are spiking worldwide. In the US, the 10-year Treasury yield kissed the magic 3.0% late Thursday, at least briefly, for the first time since July 2011, up from a low of 2.75% at the beginning of the month. It will drag other bond yields, mortgage rates, and other consumer and corporate rates behind it.

Pimco's fund wasn't alone: in total, $39.5 billion were yanked out of bond mutual funds in August, $21.1 billion in July, and a record of $69.1 billion in June. Emerging market funds, international bond funds… they've all gotten hit.

The Great Rotation out of bonds into stocks? Alas, that concept is vacillating between pipedream and deceptive hype, proffered by Wall Street for its own benefit. In reality, it doesn't exist.

As bond-fund investors are pulling up their stakes, the hapless funds have to sell bonds, but for each bond they sell, there has to be a buyer, and for each dollar a fund receives for its bonds, there has to be a buyer willing to surrender it. It's a zero-sum game. Um, plus the fees – because someone always makes money on Wall Street.

So the total number of bonds out there is constantly increasing as government and corporations issue new bonds and roll over maturing bonds, instead of paying them off with cash they'd put aside for that purpose (a concept that has become a quaint joke). This flood of new bonds must find buyers. Central banks have stepped in, with the Fed currently buying $85 billion a month, the Bank of Japan buying a lot, along with other central banks. In the end, there must be a buyer for every bond.

So there cannot be a rotation out of bonds. But there can be a rotation out of bond funds and into bonds pure and simple – and that is happening. It's a painful process. As bond funds are forced to unwind their holdings, others step in to buy these bonds, at an ever lower price. This causes further bleeding in bond funds, more antsy investors who are yanking out their money, more force selling by bond funds….

It's the unwinding of the “wealth effect” that the Greenspan Fed had pulled out of thin mountain air and incorporated into its unfounded belief system, and that the Bernanke Fed in its desperation elevated to a state religion, and a justification for printing $3 trillion, and that the Bank of Japan is now bandying about as part of its new religion.

They claim that inflating the values of bonds, stocks, real estate, farmland, MBS, no matter what kind of asset, by hook or crook, including forcing down interest rates to near zero and printing truckloads of money, will create “wealth” out of nothing, and that people who are thus “wealthy” will spend some of that “wealth” and crank up the real economy.

That religion hasn't worked very well in the US – where the Fed is blowing $3 trillion on it. If it works at all, it only works for a limited time. Some individual investors, the lucky ones, can pull out their money and consume their gains, but investors as a whole cannot; because for each investor wanting to dump some assets, there has to be another willing to buy them. But they feel wealthier as they see their balance sheets or 401(k)s swell up. And so they might dip into their cash accounts or borrow against their inflated assets to buy some baubles.

Then the hangover sets in. Asset values cannot be inflated forever. Something has to give. Now bonds are sliding, taking down bond funds with them, and our antsy investors are dumping their shares, and bond funds are forced to sell more bonds just when other investors are reluctant to jump into the fray to buy them, and just when the Fed is contemplating pulling up its stakes too, and prices slide further. The giddy “wealth effect” that the Fed printed into existence evaporates, and people end up poorer, not only by the money that they thought they had and that they then spent, but also by the amount that their investments declined in value. It's not an uplifting process. This is the wealth effect in reverse – the essential consequence of any wealth effect – and the Fed has wisely shrouded itself in silence on the topic.

“Bernanke's maniacal money printing after the Lehman event catalyzed a virtual stampede back into the very same risk-asset classes which had been reduced to smoldering ruins,” David Stockman writes. It produced the craziest junk-bond binge of all times, allowing the mega-buyouts from before the crisis to survive and pay rich fees to the LBO lords. Read…. David Stockman: How KKR Stripped The Beds In America's Largest Hospital Chain With Some Help From Bubbles Ben

This entry was posted on Thursday, September 5th, 2013 at 7:40 pm and is filed under Immediately available to public. You can leave a response, or trackback from your own site.

Amid all the news about Syria and record oil prices, you may have missed a crucial red flag for the bond market.

The two biggest foreign investors in U.S. Treasuries have been aggressively selling bonds since June. Those two countries are China and Japan, and their actions are a sign of the growing risk of owning long-term bonds.

In the month of June, these two countries accounted for nearly $40.8 billion in sales of U.S. Treasuries. Now June is the most recent month of data available - and it's likely that the exodus has continued in July and August.

After years of buying more U.S. Treasuries at every auction, China and Japan have actually started selling their stakes. These countries have been selling U.S. Treasuries for three months now, and their sales are accelerating.

Now, China and Japan can't just dump all their Treasuries overnight. After all, China owns $1.3 trillion of Treasuries and Japan holds $1.1 trillion. Massive selling overnight could cause panic in the bond market and disrupt foreign and trade relations.

Important to note is that June sales of U.S. Treasuries marked the biggest outflow since 1977 when the government began collecting data. And it's no coincidence that the massive selling happened immediately after Ben Bernanke announced plans to “taper” bond purchases. The end of QE3 is underway, and foreign investors don't want to stick around.

A senior economist at the Chinese Academy of Social Sciences - a top China think-tank - had this to say. “China's net selling of U.S. treasury could be a reaction to the possible QE exit. Holding too much U.S. debt is not wise at a time when Treasury yields rise and prices fall.”

In a couple weeks, data for July will be available. When it comes out, I expect we'll see that June was just the start of a massive sell-off in U.S. Treasuries.

The selling to date has been primarily long-term bonds. That's because bonds with lengthy durations have the most to lose when interest rates rise.

While China and Japan can't dump all their long-term U.S. Treasuries overnight without tilting their hands investors like you and I don't have the same problem. We can and should be following the lead of China and Japan: now is the time to sell Treasuries.

The tides are clearly starting to turn. Even Pimco's Bill Gross – The King of Bonds – says “the secular 30-year bull market in bonds likely ended on April 29, 2013.”

After all, two of our country's biggest trading partners and bond investors have stopped buying our bonds. Not only that, but they're now selling their existing holdings into the market. If China and Japan don't want to buy our bonds, who will?

Whether you own bonds today or have already sold your holdings, you should be concerned.

Source: China And Japan Don't Want Our Bonds

I am an avid surfer and have always enjoyed being in the ocean throughout my life. When I'm riding waves I find that it completely takes me away from the stresses of the financial markets and other daily tasks. The key to successfully navigating the 10 second rush of adrenaline you get when you catch a swell is to find the sweet spot in the break. That unique place that is not too far out on the shoulder and not too far back near the white water that will carry you the farthest and give you the smoothest ride. With the ocean constantly swirling around you and currents threatening to push you off course, being in perfect trim will allow you to sail through the surf and emerge from the water unscathed.

I think that this concept can also be applied to fixed-income investing at the moment. This year has been tumultuous for investors in long-dated treasuries, emerging market, and municipal bonds. The stratospheric rise in interest rates has caught the vast majority of bond investors off guard and introduced a great deal of volatility back into what has traditionally been an asset class with minimal price fluctuations. The exodus of income investors from bond ETFs and mutual funds has been well publicized amid concerns over higher interest rates and Federal Reserve asset purchase tapering.

However, there is still one slice of the bond market that is continuing to thrive amid the turbulent seas. Short-term high yield bonds have been one of the best performing sectors in 2013 and have experienced very little price volatility. Two ETFs that hold the majority of the assets in this space are the PIMCO 0-5 Year High Yield Bond ETF (HYS) and the SPDR Barclays Short Term High Yield Bond ETF (SJNK).

Both of these funds are currently sitting very near their all-time highs and have had excellent relative performance vs. their longer dated peers. HYS has an effective duration of just 2.04 years and a current distribution yield of 4.33%, while SJNK has a slightly higher effective duration of 2.30 years and a 4.57% yield. These ETFs have both benefited from their shorter durations which insulate them from the pernicious effects of rising interest rates. In addition, their above-average yields make them attractive for income seeking investors that desire a steady monthly dividend stream from their holdings.

Another newcomer to this arena is the PowerShares Global Short Term High Yield Bond Portfolio (PGHY). This fund is unique in that it is one of the first ETFs to combine international exposure with domestic high yield holdings. Currently PGHY is weighted 44% in the United States and 56% in developed and emerging market countries. Despite the fact that this ETF was just released this month, it has already grabbed my attention because of its unique country diversification and higher yield. The fund currently has an effective duration of 1.55 years combined with a yield of 4.80%.

Now despite the low volatility and high income from these ETFs, there are still several risks lurking beneath the surface. The high yield market has blossomed over the past several years due in large part to below average default rates. However, several experts are predicting that we may see an uptick in defaults as well as spread compression if the economy hits a rough patch. This would cause the value of high yield bonds to fall and likely spur a rally into higher rated securities such as Treasuries or cash.

How to Profit From High Yield Bonds

As a trend follower I am always monitoring my investments in relation to their historical price patterns. As you can see on the HYS chart above, the upward trend in still intact and I am continuing to hold an allocation to this sector for capital appreciation and income. For clients in my income portfolio, I have selected the Osterweis Strategic Income Fund (OSTIX) as an actively managed high yield mutual fund equivalent. This fund also has modest exposure to convertible bonds as well.

If you already have an allocation to these investments or similar holdings, then I would recommend continuing to ride their success until we see a change in character. New money can be introduced on any modest pullbacks to enter new positions or reallocate existing capital. You should size your positions in line with your risk tolerance and may want to consider pairing high yield with high quality bond positions in order to offset the credit risk in your portfolio.

Going forward I will be monitoring credit spreads, interest rate changes, default rates, and volatility in the context of a risk management plan to stay on top of the changing high yield landscape. If a trend change starts to develop, I won't hesitate to downsize or remove this sector entirely from the portfolio in order to actively shift my holdings into areas of the market that are performing in a superior capacity.

Source: How To Play The Sweet Spot In High Yield Bonds

Additional disclosure: David Fabian, Fabian Capital Management, and/or its clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.

Kathleen Hays, Anchor:

We've been talking a lot this week, today in particular, on Bloomberg Radio about
the sell-off in the U.S. government bond market; so much upward pressure. But, you
know, there are bond strategies that some of the biggest bond firms like PIMCO out
in Newport Beach follow, and one of their most successful managing directors,
portfolio managers, is Mark Kiesel. He has been named, in fact, by Morningstar fixed
income fund manager of the year for the past couple of years. He is also global head
of the corporate bond portfolio management group and a senior member of the
investment strategy and portfolio management group-a big mouthful.

But, Mark, you're obviously at the helm at PIMCO. Welcome to Bloomberg Radio.

Mark Kiesel, Global Head of Corporate Bond Portfolio Management, PIMCO:

Thank you.

Hays:

Great to have you back. It's been too long. Let's start with the obvious: we've had
a big, swift move in yields higher-the benchmark 10-year treasury nearly to 3
percent. Some people say that's about it, because these higher rates are starting to
slow the economy, and that will be a natural break on bonds. Others say, when the
Fed actually takes that tapering step, which they may do in two weeks, bonds are on
their way to at least 3.5 percent. What do you see?

Kiesel:

Well, we think the backup has been significant. The bond market, in our opinion, is
pricing in basically 3 to 3.5 percent real growth for next year, and PIMCO doesn't
see that degree of growth. We're positive on growth in some sectors, but overall, we
think the bond market is overshot in terms of higher rates, and we also think that
these rate levels are going to start to generate interest amongst our clients in
terms of the all-in yields.

Hays:

Okay. So you, then, would agree that people are going to see that we've had this big
move, yields have moved up, so, to a certain extent, if you're buying and holding,
you have more value, have more return, and at the same time, with what's happening
in the economy, maybe this is it for a while?

Kiesel:

Yeah, and we have a lot of clients, for example, in insurance companies, pension
funds-if you look at some of our corporate bond portfolios now, they're yielding 5
percent in intermediate, five to 10-year area bonds. And, in 30-year bonds, they're
yielding close to 6 percent. These yields of 5 to 6 percent, we think, are very
attractive, and basically, clients are able to now invest in what we consider to be
a decent, almost equity-like return in corporate bonds, which historically have
about one-third the volatility of equities. So, overall, we think these yield levels
are a pretty good entry point.

Hays:

And, of course, corporate bonds are subject to interest rate risks that treasuries
and other kinds of bonds that are very interest-sensitive are, but they have the
credit component, as you're pointing out, that if the economy grows and it's good
for the companies who have issued these bonds, it's good for the investor.

Kiesel:

Yes, and we've been anticipating higher rates. And, in our credit strategies, what
we've done is we've tried to position in companies that are outperforming the
overall market from a growth perspective: these industries like autos, like energy,
like housing, like gaming. These industries are growing two, three, four times
faster than the overall economy, and so you're getting credit upgrades. And that
spread tightening can actually help offset some of this rate rise, so by owning the
industries with growth, that's how you can defend yourself against these higher
interest rates.

Hays:

One of the industries that you are positive on, or you're overweight, is energy. Why?

Kiesel:

Oh, energy is a game-changer. What's happening in North America is really a
revolution. Look at North Dakota: you've got growth of over 13 percent. You've got
overall oil production in the United States growing at 15 percent in some of the
shale regions like the Bakken. You look at the compound annual growth rate over the
last three years: it's been 36 percent. It's been 85 percent in Eagle Ford shale.
This is a game-changer, and so PIMCO has been invested in this sector for seven
years, and we've been following this revolution. We're invested in E&P companies
like Pioneer and EOG and Continental. We're invested in long-haul pipeline companies
like Plains All American and Enterprise Products, and we're invested in these
gathering and processing firms like MarkWest Energy and Targa. And the reason is
that this industry is growing at 10, 15 percent when the overall economy's growing
at 4 or 5.

Hays:

Okay. We're just getting started with Mark Kiesel from PIMCO, looking at
opportunities in the corporate bond market. Yields may be rising; they could go even
further, but many of the companies that PIMCO invests in have the opportunity to
offer some pretty handsome returns. Mark Kiesel continues on The Hays Advantage,
Bloomberg Radio. Keep it right here.

[Commercial break]

Hays:

Let's get right to our look at the corporate bond market. There's a lot of concern;
you see money leaving a lot of bond funds, in fact, but Mark Kiesel is with us on
the Ring Central phone line, managing director at PIMCO-also, the last couple of
years, Morningstar has named him the fixed income manager of the year-to talk to us
about that.

I just want to talk about-just have you comment, Mark, on running any kind of fund,
and of course, PIMCO now the largest mutual fund, not just largest bond fund in the
world. So, you guys are used to the volatility, the ups and downs. There have been
redemptions at all the big bond funds. Is this just kind of par for the course? Is
this just the ebb and flow of the markets, or is it something that concerns you?

Kiesel:

No. I think rates got, obviously, to a very low level back in May, and we were
reducing risk back then. But this happens with cycles, and as such, we're prepared
for this. We keep a lot of cash in our funds to prepare for these types of
withdrawals, and I think we're positioned appropriately, given what we were talking
about earlier in terms of overweighting the right sectors.

Hays:

And that is the key here. And, of course, you said that your sense is as investors
see the opportunities, there are some people who are going to be coming back, at
least to certain kinds of bonds. You like energy-related companies, energy-related
bonds; are there any companies in particular that stand out, or any-it's a large
industry-any kind of oil company that is the most promising investment opportunity
right now?

Kiesel:

Well, there's three ways to play energy. Basically, the E&P companies, which are
producing the oil and gas, and there, you want to stick with, basically, the
companies that are in the shale regions. In Permian, we favor a company called
Pioneer Natural Resources. In Eagle Ford, we favor a company called EOG. And, in the
Bakken, we favor a company called Continental. You can also play energy through
owning pipelines and midstream energy: we own Plains All American and Enterprise
Products. Midstream is actually probably the fastest-growing sector. Those
companies, like MarkWest and Targa, are growing over 20 percent a year, and that's
simply a function of the growth in the shale region.

Hays:

Okay. Let's move on to one of the other industries that you like, and I want to talk
about housing, but I want to make sure we talk about autos, because following you on
the show, Mike Jackson, chairman and CEO of AutoNation-they are doing so well; a
Fortune 500 company, their sales up year-over-year 32 percent; the best, for them,
since 2003, but overall, the auto sales we're seeing, we're getting it back to the
old normal, just about, here, right? The sales we just got for August were the best
since 2007.

Kiesel:

America's back by four. That's the comment we've been making over the last year, and
I think what's happening here is you're recovering off of a depressed level. There's
been significant capacity reductions; there's significant pent-up demand. You've got
an increase overall in the U.S. market now of 10 percent, and you've got good
products. There's also big pent-up demand for more fuel efficiency, and so consumers
are now replacing older vehicles; the average age of the fleet is over 11 years old.
You've got the energy industry driving truck sales. So, this industry is back, and
we've been favoring it over the last year or so.

Hays:

Okay, let's talk a little bit about the kinds of returns we can expect. The Fed, of
course, has pointed to the gains in autos as one of the signs that quantitative
easing has been successful: interest-rate-sensitive sectors have responded. But, if
rates are going higher, are autos going to be affected by that, or are autos more
immune than housing?

Kiesel:

Well, autos are a little bit more immune than housing simply because, basically,
you're dealing with a lot of pent-up demand because the average age of the auto is
11 years old. They're definitely interest-rate-sensitive, although what's happening
is that the replacement cycle and the need for more fuel-efficient vehicles is
really driving that. Housing is going to be more impacted. We basically think that a
rise in 100 basis points, or a 1 percent increase in the mortgage rate today, will
increase monthly payments by about 12 percent. So, with housing, we think the higher
rates will have a bigger impact.

Hays:

Indeed. And yet, this is one of your biggest picks.

Kiesel:

We still like housing, and it's very similar to autos. Housing's growing because
it's recovering cyclically off a very depressed level. If you look at the inventory
situation, it remains exceptionally low. Basically, where people want to buy
housing, almost none is available. Household formation is also picking up. You've
got housing which is affordable, not only on a relative basis but relative to
international housing prices. You've got the improving labor market, higher wealth
thanks to QE, rising confidence, and, over time, support of population growth. The
way we've been playing this is then to be overweight securities, which will
outperform as housing prices gradually rise, like non-agency mortgages. We also,
importantly, are playing what we call a remodel cycle, which is kicking in. 30
percent of the housing stock is new homes, but the remainder is existing, and those
existing homes need to be remodeled. As the home equity rises, consumers are going
to be a lot more inclined to put more money into their house. So, we think this will
benefit companies like USG and Masco-building material companies-lumber companies
like Weyerhaeuser, appliance companies like Whirlpool, as well as home improvement
companies like Home Depot.

Hays:

So, when you put together a fund, are you putting together everything from the
appliance makers, the lumber producers, to the homebuilders themselves, the names
like Pulte, Lennar, and more?

Kiesel:

Yes. Basically, our strategy is to own companies that are acting in bondholder
interest, where they're basically using strong growth and free cash flow to
organically delever their balance sheets. That, we think, leads to credit spread
tightening over time, which, again, offsets this higher interest rate rise. The
homebuilders are an interesting investment right now on land. One of the biggest
issues why starts are constrained right now is land availability, and so, if you
believe that all this QE and excess liquidity ends up into real assets, homebuilders
are basically long land. Many of these homebuilders, like Toll Brothers and others,
own key positions in relatively high barriers to entry areas. The other thing about
Toll Brothers is it's less interest-rate-sensitive than some because the interest
rate sensitivity is really hitting first-time buyers more. The average selling price
for a Toll home is almost two times higher than the market. In addition, they have
very strong positions in the East Coast in terms of land.

Hays:

You also like gaming.

Kiesel:

Gaming is another secular growing industry. Again, the key to all these strategies
is growth. And what's happening in gaming is really amazing. It's really a Macau
story. Macau is growing, basically, at 15 percent a year. This is a limited-license
market. The government has put in significant investments and infrastructure. Keep
in mind, Macau in 2005 was a $6 billion gaming market; today, it's a $41 billion
gaming market. So, this market is big. The government is investing in bridges,
ports, high-speed rail, highway expansion. They're building visitation facilities.
All this is going to expand Macau. And, again, I think this is also a play on the
rising middle-class Chinese consumer, which we still think is going to lead to
pretty significant double-digit growth rates in the mass market in Macau. So, we've
been investing in companies like Wynn, companies like MGM, Las Vegas Sands, MPEL.
This remains, again, a secular overweight in our portfolios because of these strong
emerging growth dynamics, particularly with consumers in emerging markets in China.

Hays:

Mark, I've got a question from one of our faithful listeners, Anthony, who is an
aficionado of bonds, but he's asking, instead of bonds, how about fixed annuities?
Is that a question you can give us a quick answer on?

Kiesel:

I'm not an expert on fixed annuity, so I think I would pass on that one. [Laughs]

Hays:

You are an expert on-so, if we're looking at housing, if we're looking at gaming, if
we're looking at autos, if we're looking at energy, give us a sense of the kind of
returns that PIMCO is hoping for, anticipating, as people think broadly about
whether it's time to look at some of these investments?

Kiesel:

Sure. So, many of the companies that I just described, they're yielding right now
between 5 and 6 percent. We think that the backup in rates is pretty much towards
the latter part of this backup, and so, what that basically means is that an
investor in today's market is likely going to be earning roughly this 5 to 6 percent
in intermediate-type corporate bond, which, again, we think is almost an equity-like
return. Historically, these corporate bonds have been a third as volatile as stocks.

Hays:

Quick, final question-I'm asking everybody today-will the Fed vote for the taper in
September? Will we see the first step, even a baby one, next two weeks?

Kiesel:

Yeah, I think the writing is pretty much on the wall. The Fed's likely going to
start tapering. We think it's going to be roughly $10 billion. We also think it's
going to be with treasuries. They're going to be hesitant to taper with mortgages
because of the negative impact on housing.

Hays:

Mark Kiesel, thanks so much for joining us.

Kiesel:

Thank you.

Hays:

Very much appreciate it. From PIMCO, global head of corporate bond portfolio
management, a member of the investment strategy group and more, Morningstar fixed
income number one of the last two years, Mark Kiesel. Thanks so much.

***

Sept. 5 (Bloomberg) –- On today's “Weird Wall Street,” Adam Johnson, Trish Regan and Matt Miller discuss bizarre stories in business. They speak on Bloomberg Television's “Street Smart.” (Source: Bloomberg)

BlackRock fund manager Andrew Swan can see more upside from India despite recent bad news about the country's economy.

Swan, who manages the $730m BlackRock Global Funds Asian Dragon fund and its onshore-mirror which launched in July, identifies Indian exposure as the only difference between the two portfolios.

The manager feels it is too early to enter India and is waiting for stability in the Indian political environment which will give way to reform. Additionally, Swan is aware of the impact the US economy and its own monetary policy has on the Indian economy and the rupee.

“We are keeping a close eye on how things develop over the next six months. Reform may be challenging because in the next six months there are national elections coming up and policies may end up being more populist than reformist,” he says.

“Ultimately, we are watching the US bond market. If bond yields go up, it will put more downward pressure on the rupee. If we see stability in US bonds then it will allow the government to start implementing reform.”

India's troubled economy was further dealt bad news when economic growth great at rate of 4.4. per cent in the second quarter, a slowdown from the beginning of the year when growth was 4.8 per cent - the slowest rate of growth since 2009.

The rupee has also weakened as it got caught up in the emerging market downturn, falling 18 per cent from the beginning of the year to 4 September.

However Swan, who has 8-9 per cent exposure to India in the established offshore fund, would look to match this in the onshore version once infrastructure spending picks up.

Swan says: “Overall, I think it is a little bit premature to go to India. The big opportunity for India is infrastructure. It has the opposite problem to China, as it does not have investment to back it up.”

India imports its fuel, which means there is a mismatch of pricing between fuel and energy.

Swan adds: “A lot of power plants in India are commencing at an operating loss so these projects are at hold while the government decides how to link fuel prices to energy prices.

“These infrastructure projects may be kick-started soon due to the necessary stress and duress being seen in the economy.”

Elsewhere, Swan has been de-risking his portfolio - reducing exposure to south-east Asia and cutting betas in the fund down to one.

To receive more relevant articles like this one, why not sign up to our briefings and breaking alerts by clicking here and Follow @fundweb

With the end of QE in sight, things are starting to look up, according to , co-manager of the BlackRock UK Special Situations Fund.

Equities remain attractively valued

With UK interest rates at an all-time low, and cash not yielding much for savers, equity investors are seeing the benefits of investing. There are higher growth rates in certain parts of the world, signalling signs of recovery, and with over 75% of the earnings of the UK equity market being derived from overseas, the UK small & mid cap sector has successfully positioned itself towards markets and industries that demonstrate higher growth prospects.

Signs of stabilisation and roots for positive recovery are also being seen in Europe, with Europe Markit Services PMI: 51.3 in August 2013, up from 46.2 in August 2012.Looking to seize these value opportunities and investing in companies that have high exposure to these regions and sectors, such as our holding in a company called SIG, an insulation and energy management company operating in the UK and mainland Europe, that has high exposure to European growth.

Growth is much more balanced than it used to be

Emerging markets are in a process of deceleration, although still growing faster than developed markets, where growth is largely in specific sectors. In the UK this is driven by the consumer and house builders and in the US the construction sector. The UK house building sector has undergone a contraction in lending to unlisted companies and businesses such as Bovis and Bellway take a much greater share of the new build market, while the Help to Buy scheme is stimulating demand.

With growth being driven by the West, investments in emerging markets are being approached cautiously. The GDP figures coming out of China are much more muted than previously, and this will provoke continued volatility in the emerging markets. For this reason, Standard Chartered, a bank which has considerable emerging market exposure, is no longer considered attractive."

The end of QE signals economic recovery

Although QE tapering will incite market volatility in the short term, it signifies recovery, and demonstrates that the world is in a more stable place. Whilst this trend is mainly beneficial, the UK elections in May 2015 do need to be taken into consideration as they will likely lead to volatility in the market.

Even in a post-QE world the small-cap market may continue to outperform the large cap market. Since the inception of the Numis Smaller Companies Index in 1955, it has outperformed the large cap index 3.8% per annum on average. Companies capable of good earnings growth, with strong management teams, track records and balance sheets are likely to be rewarded with continued market share gain as they reap the rewards by continued investing in difficult times. Two examples in the BlackRock Special Situations Fund are: Aveva, a computer software company, and Rotork, a world leading global manufacturer of electric, pneumatic and hydraulic valve actuators. Both have survived the downturn and have grown significantly and sustainably over the medium term.

With UK small caps growing at a much faster rate than large caps, investing in small caps may continue to provide investors with significant returns.

2:41pm BST BlackRock's Special Situations star Richard Plackett is backing Aveva and Rotork in a post-QE world.

Plackett, who is A-rated by Citywire, said central bankers' decision to turn off the stimulus tap is a sign that the economic recovery is gaining strength.

Only yesterday a string of data showed the UK's outlook was brightening, with a rush of new business driving services numbers to a six-year high.

Plackett said there are signs of stability emerging in Europe's economy too, where the services PMI reading has also climbed and last month hit 51.3, up from 46.2 in August 2012.

He said he is looking to seize returns from a repairing Europe through holdings in insulation and energy management firm SIG, which has operations in the UK and the Continent and is well positioned to exploit growth in mainland Europe.

Elsewhere, Plackett (pictured) said he has the end of quantitative easing (QE) in sight.

He said: 'Although QE tapering will incite market volatility in the short term, it signifies recovery, and demonstrates that the world is in a more stable place.

Plackett continued: 'Even in a post-QE world the small-cap market may continue to outperform the large cap market. Since the inception of the Numis Smaller Companies Index in 1955, it has outperformed the large cap index 3.8% per annum on average.

'Companies capable of good earnings growth, with strong management teams, track records and balance sheets are likely to be rewarded with continued market share gain as they reap the rewards by continued investing in difficult times.'

Plackett said that in his £1.7 billion UK Special Situations fund two examples of stocks that should be rewarded are engineer Rotork and computer software firm Aveva.

'Both have survived the downturn and have grown significantly and sustainably over the medium term,' he explained.

Plackett continued: 'With UK small caps growing at a much faster rate than large caps, investing in small caps may continue to provide investors with significant returns.'

Over three years to the end of August, Plackett's fund has outperformed the FTSE All Share TR Index, delivering 52% versus 43.3%. He has also beaten his typical UK All Companies peer, according to Citywire data.

Over the same stretch he has returned 52.1% compared to his typical sector competitor's 45%.

Andreas Zoellinger, co-manager of the BlackRock Continental European Income fund, is backing mid-caps for dividends as valuations in some larger companies become overstretched. Despite lower valuations relative to UK and US peers, Zoellinger suggested some sectors in Europe are already becoming fully valued, forcing managers look further down the market capitalisation scale.

One of the mid-cap stocks in his portfolio is Kone, a lift manufacturer paying a 2.9% dividend, which makes up 3.3% of the fund.

"There is space for dividend growth in mid-caps, and companies like Kone are still net cash and have a target total shareholder return," Zoellinger (pictured) said.

The manager is also shifting from more expensive areas, such as consumer staples, into sectors like insurance and infrastructure companies.

He holds Swiss reinsurer Swiss Re and insurer Zurich Insurance Group in his portfolio, and has also invested in Italian electricity group Terna as a domestic infrastructure play.

"The opportunity set in Europe is changing now and we need to be flexible in shifting our allocations to areas which provide dividend growth," the manager said.

As investors consider European equities again, Zoellinger sees a more diverse market for dividend investing in Europe than in the UK.

"There are around 30 companies in the UK with a market cap above 1bn paying a dividend of 4% or above, while in Europe there are over 100," he said.

He also added that 84% of companies in the portfolios have increased their dividends last year, which points to a positive trend in the European market.

The fund has benefitted from this trend, returning 35.7% over the year to 23 August, according to Morningstar, versus an average of 31.4% for the IMA Europe ex UK sector.

BlackRock Inc. (BLK), the world's largest money manager, bought shares in Eike Batista's OGX Petroleo & Gas Participacoes SA this week as the worst-performing crude oil producer increased its presence in Brazil's benchmark index.

The BlackRock Brasil Gestora de Investimentos Ltd. unit acquired 93.5 million OGX shares for its exchange-traded fund, according to data compiled by Bloomberg based on a filing dated Sept. 3. The shares were worth 39.3 million reais ($16.8 million) based on Sept. 3 closing prices. ...

Piling on other critics, a recent Bloomberg Businessweek magazine cover called hedge fund returns a "myth." But investors are still buying into promises of juiced up returns.

The largest hedge fund firms in the Americas—those managing $1 billion or more in assets—kept adding assets in the first half of the year, according to Absolute Return's twice-annual . That puts assets for the 287-firm group at $1.57 trillion as of July 1, up 7.46 percent from $1.46 trillion at the start of 2013 and near the all-time-high of $1.68 trillion in July 2008. Nineteen new hedge funds firms joined the club with assets hitting $1 billion or more since January. (Read more: ) Pensions, endowments and other investors are adding to the $2.7 trillion hedge fund industry despite mediocre performance so far this year, at least compared to stocks.

The Absolute Return Composite Index, which tracks thousands of funds across various strategies, gained just 4.05 percent through July. That compares to gains of 19.63 percent for the S&P 500 index and 14.14 percent for the MSCI World Index over the same period.

Bridgewater Associates remains the largest firm in the Americas at $81.9 billion in hedge fund assets (Ray Dalio's macro shop manages $150 billion overall). (Read more: ) That leading position is despite a $1.4 billion drop from January—the firm's first six-month drop in assets since 2009—due to slightly negative performance in its flagship Bridgewater Pure Alpha Trading Co. fund.

It fell 0.89 percent net of fees through June, although the fund is back up 2.8 percent through August, according to a person familiar with the returns.

Others in the top five of hedge fund assets were multistrategy shops J. P. Morgan Asset Management ($50.6 billion), Och-Ziff Capital Management Group ($33.9 billion) and BlackRock ($28.7 billion). Value investor Baupost Group was fifth at $28.5 billion. (Read more: ) The largest gainers so far this year were J.P. Morgan (up $6.6 billion); equity-focused Adage Capital Management (up $4 billion to $22 billion); and quantitative shop AQR Capital Management (up $3.9 billion to $24.2 billion).

The largest losers were multistrategy First Quadrant (down $1.1 billion to $11.1 billion); multi-strategy Citi-spinout Napier Park Global Capital (down $1.87 billion to $2.83 billion); and equity firm Standard Pacific (down more than $1 billion to $1.5 billion).

—By CNBC's Lawrence Delevingne. Follow him on Twitter @ldelevingne.

...Paying Uninterrupted Dividends Since 1948

SAN MATEO, CA--(Marketwired - Sep 5, 2013) - Franklin Templeton Investments is commemorating the 65th anniversary of the Franklin Income Fund ( NASDAQ : FKINX ). Introduced on August 31, 1948, Franklin Income Fund has delivered income to investors through up, down and sideways markets. US Baby Boomers are turning 65 at a rate of 10,000 per day. 1 While many of them are making pl [More...]

More from Vaughan Scully A Murky Future for Commodities ETFs Two Five-Star Target Funds Leveraged ETFs Are Playing with Fire Learn About the Expert Legendary investor John Templeton died in 2008, leaving behind a set of investing maxims that are still followed by the managers of Templeton funds. As an investor, Templeton was a contrarian by nature, notes Vaughan Scully, of S&P Capital IQ in The Outlook.

He moved his office from New York to Nassau, the Bahamas, in part, to get away from the groupthink that prevailed on Wall Street, and claimed his performance improved because of it.

One of his maxims exhorts investors to do the same: âIf you buy the same securities as other people, you will have the same results as other people. It is impossible to produce superior performance unless you do something different from the majority. To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.â

James Harper, one of five managers currently running the Templeton World Fund (TEMWX), cites this maxim in explaining how the fund is managed and the philosophy behind it.

âWe are completely bottom-up driven, five-year time horizon, value-oriented stock pickers,â he says. âWe tend to buy when people are selling, and sell when people are buying. That, I think, gives you the best long term performance.â

Templeton sold his fund company in 1992 to what is now Franklin Templeton Investments, but the Templeton funds are still managed in Nassau according to John Templeton's unique style.

The Templeton World Fund opened in 1978 and has long been team managed. In 2011, however, after a period of inconsistent performance, the team was restructured, to give each of the five managers one fifth of the fund's assets and have them invest independently.

In addition to managing the World Fund assets, Harper and the firm's other portfolio managers, are also fundamental sector analysts, with Harper covering global insurance and information technology hardware. These analysts produce a Bargain List that portfolio managers use to initiate new positions.

Currently, the fund has 102 different holdings, a number Harper says managers try to keep from growing much larger. The team tries to keep every holding at least 0.50% of total assets; the largest holding, Citigroup (C) is 2.4% of the assets under management.

The bottom-up driven management sometimes leads the fund to have significantly different weightings on, both a sector, and a geo-graphic basis than its benchmark, the MSCI World Index. Harper says the managers just let their bottom-up, value style take them wherever it leads.

As of July 31, the fund had about 42% of its assets in Europe and just 39% in North America, compared with the MSCI World index, which has almost 55% of assets in the US.

Three of the fund's top 10 holdingsâING Groep (ING), BNP Paribas (Paris:BNP) (US:BNPQY), and Credit Suisse Group (CS)âare European financials that came into the fund beginning in early 2012, when the team began to sense the pessimism regarding the European banking sector was too extreme.

âWe took a pretty aggressive stance on financials 18 months ago.â Harper says. âIn May 2012, there were valuations that were effectively unprecedented. European financials were trading at 30% of book value. That's a good example of us saying 'the market is clearly concerned.' We didn't believe that was the case and saw amazing opportunities. A lot of those companies have doubled. That's what we're trying to do on an ongoing basis.â Subscribe to S&P's The Outlook hereâ¦

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Institutional investors are likely behind the selling.

Investors pulled $20.4 billion from exchange-traded funds in August, the worst month of flows for ETFs on record and a sharp reversal from the $39.5 billion inflow in July.

The selling was strongest out of U.S. equity ETFs, where investors withdrew $15 billion. But on a percentage of assets basis, selling was heavier out of taxable bond funds, where investors pulled $6.7 billion. ...

Bloomberg Radio's Catherine Cowdery reports on Exchange Traded Funds. .

It's easy to write off the Nashville Area ETF (NASH) as a country bumpkin in a $1.5 trillion market.

Picture it as a new ETF stepping off the Greyhound bus with a suitcase in each hand, straw on its shoulders, staring up at the ETF giants covering every conceivable corner of the market. It's wondering where it might fit in.

To back up, NASH launched while you were on summer vacation, offering improbable equity exposure to the businesses in the greater Nashville area.

Thought leaders in coastal financial centers and people everywhere probably thought “Why?” Why offer such narrow equity coverage? And why Nashville? ...

Investors fled bond funds last month on fears of the possible start as soon as this month to the Federal Reserve's “tapering” policy amid steady, if also slow, growth. But pockets of the fixed-income market, notably senior loans, were actually helped by views that the Fed's quantitative easing bond-buying program might start to wind down.

Last month, investors trimmed interest-rate risks and bailed out of Treasurys as signs of a recovering U.S. economy began to take further shape. If today's ADP jobs report showing 176,000 new U.S. jobs were created last month is any indication of how the official U.S. monthly jobs report will look on Friday, then the likelihood of the Fed making its move perhaps at the end of its Sept. 18 policy meeting is looming even larger in investors' minds. ...

Arca, the New York Stock Exchange's electronic trading platform, this week launched its market-maker incentive program covering certain exchange-traded products, fulfilling its aim to roll the program out after more than a year of fine-tuning it. Regulators in June approved the program, which is designed to ensure smoother trading of less liquid ETFs.

Under the optional pilot program that will last at least a year, issuers can choose the amount they would like to pay—between $10,000 and $40,000 per ETP annually—to be a part of the program. Lead market makers (LMMs) will get fixed quarterly payments, rather than variable enhanced transaction rates, in return for meeting monthly LMM quoting obligations, the NYSE said. ...

A disappointing year for Polish-stock enthusiasts — yes, they're out there — got tougher on Thursday. The country's stock index fell as much as 6%. U.S. exchange-traded funds slumped more than 5% thanks to an unusual plan more or less to cancel billions of dollars of bonds held by private pensions.

The government's plan would siphon some 121 billion zloty (nearly $37 billion) of sovereign bonds back into the public till– a blow to the pension funds holding the debt, reports Bloomberg.

Strategists are being trotted out to argue the move effectively sucks the wind out of Poland's stock market, by depleting local pension funds of assets without compensation, not to mention spooking just about everybody.

From Marcin Sobczyk of the Wall Street Journal:

The move—intended to reduce Poland's debt burden as it breaks out of a self-imposed structure of limits—stopped short of a previously announced option of nationalizing the funds' holdings in listed companies.

The funds are unlikely to be compensated for the lost assets as they were bought with employee contributions that would otherwise have gone to the government—meaning the bonds held by private pension plans are effectively considered to be state-owned already. They will be redeemed once in government hands.

My colleague Shuli Ren calls the old way of doing things “a strange system … the government did not receive any retirement contribution from its citizens and financed pension payouts with government debt issuance.”

What do fund prospectus documents say again about emerging markets risk, single-country risk, etc.?

iShares MSCI Poland Capped ETF (EPOL) has dropped 5.2% to $25.28 in afternoon trading; Market Vectors Poland ETF (PLND) is down 5.2% to $46.

Poland is a small allocation for broad emerging-markets funds, which are chugging along Thursday – iShares MSCI Emerging Markets ETF (EEM) and Vanguard FTSE Emerging Markets ETF (VWO) are gaining about 1% apiece.

The country looms larger (about 20%) for iShares MSCI Emerging Markets Eastern Europe ETF (ESR), but this fund is also shrugging things off, rising 1.1%.

(c) 2013 Reuters Limited

(Adds additional flows, analyst comment, table)
NEW YORK, Sept 5 (Reuters) - Investors in funds based in the

United States pulled $5.1 billion out of stock funds in the latest week, even as strong economic data lifted U.S. stock indices, data from Thomson Reuters' Lipper service showed on Thursday. The outflows from stock funds in the week ended Sept. 4 marked the third straight week of net withdrawals from the funds, even as U.S. stock prices broadly rose on data showing upwardly revised U.S. economic growth and strength in manufacturing. Uncertainty over whether the United States would punish Syrian President Bashar al-Assad's government over alleged use of chemical weapons against civilians led investors to pull cash out of stock funds, said Jeff Tjornehoj, head of Americas research at Lipper. A U.S.-led military strike on Syria could be the start of a "prolonged conflict" that would be negative for stocks, Tjornehoj said. That possibility overshadowed strong U.S. economic data over the period, he added. Outflows of $5.91 billion from stock exchange-traded funds accounted for the total net outflows from stock funds. Of the outflows from stock ETFs, investors withdrew $4.8 billion from ETFs that hold U.S. stocks. Of that sum, investors pulled $3.04 billion out of the SPDR S&P 500 ETF Trust, even as the S&P 500 stock index rose 1.1 percent over the period. Investors still committed $781.8 million to stock mutual funds, but that amount marked the smallest inflows since early June. ETFs are generally believed to represent the investment behavior of institutional investors, while mutual funds are thought to represent retail investor patterns. Emerging market stock funds had $819.3 million in outflows in the week ended Sept. 4, marking the first net outflows from the funds since July even as the MSCI Emerging Markets Index of global emerging market stocks rose 3.1 percent. Investors are realizing that a spike higher in interest rates following a reduction in the U.S. Federal Reserve's $85 billion in monthly bond purchases would also lead to higher interest rates for emerging market companies, Tjornehoj said. Those higher interest rates would have an adverse effect on those companies since they would make borrowing more expensive, he added. Funds that hold Japanese stocks had outflows of $331.6 million over the weekly period, marking the sixth straight week of outflows from the funds, despite a rise of 5.4 percent for Japan's Nikkei average over the weekly period. The recent outflows are a sign that investors have become less enthused with the Bank of Japan's pledge to inject $1.4 trillion of monetary stimulus into Japan's economy in less than two years to fight deflation, said Tjornehoj of Lipper. Investors also withdrew $503 million from taxable bond funds, marking the third straight week of outflows from the funds as the yield on benchmark 10-year U.S. Treasury notes rose 13 basis points to 2.9 percent over the week. As yields rise, prices fall. The strong U.S. economic data bolstered expectations that the Fed would soon begin scaling back its monthly bond-buying, causing selling pressure on the bond market over the week. Riskier high-yield junk bond funds had outflows of $416 million, reversing small inflows in the prior week. Funds that hold floating-rate bank loans had inflows of just $728.3 million, the smallest since mid-January. Those funds, which are protected from rising interest rates by being pegged to floating-rate benchmarks, have attracted $46.9 billion in new cash so far this year, putting them on track to trounce previous annual records. Commodities and precious metals funds, which mainly invest in gold futures, had net outflows of $120 million, marking their first outflows in four weeks even as gold prices rose on geopolitical risk surrounding Syria. Spot gold rose as high as $1,416 an ounce and was up 1.4 percent at the close of trading on Sept. 3 following comments from Republican House Speaker John Boehner supporting U.S. President Barack Obama's call for limited strikes on Syria. Investors also withdrew $2.6 billion from money market funds, which are low-risk vehicles that invest in short-term securities, marking the first outflows from these funds in five weeks. The weekly Lipper fund flow data is compiled from reports issued by U.S.-domiciled mutual funds and exchange-traded funds. The following is a broad breakdown of the flows for the week, including exchange-traded funds (in $ billions):

Sector Flow Chg % Assets Count
($Bil) Assets ($Bil)
All Equity Funds -5.126 -0.15 3,446.851 10,382
Domestic Equities -4.996 -0.19 2,591.117 7,655
Non-Domestic Equities -0.130 -0.02 855.734 2,727
All Taxable Bond Funds -0.503 -0.03 1,573.677 5,094
All Money Market Funds -2.604 -0.11 2,362.657 1,329
All Municipal Bond Funds -1.307 -0.46 282.006 1,396

(Reporting by Sam Forgione. Editing by Andre Grenon, Ken Wills