Man Investments says sell U.S. banks and long-term bonds

Date: Friday, January 25, 2008
Author: uk.Reuters.com

SINGAPORE (Reuters) - Selling both U.S. bank stocks and long-term Treasury bonds are likely to be profitable trades as world's largest economy faces a potential recession and rise in inflation, hedge fund manager Man Investments said.

Thomas Della Casa, head of research at Britain's Man Investments, said U.S. banks are likely to writedown more of their credit losses stemming from the turmoil in the U.S. housing loans market.

"We are not done yet with all the writedowns," he told a news briefing at the opening of the firm's Singapore office on Thursday. Man Investments is part of the Man Group (EMG.L: Quote, Profile, Research), the world's largest listed hedge fund firm, which manages about $72 billion globally.

Banks around the world have been hit by huge losses related to U.S. subprime mortgages, home loans often extended to people who have payment difficulties or a bad credit history.

"Banks are still trying to find out what kind of structures they are holding on to, how to value them," Della Casa said.

Della Casa said a likely U.S. recession would bring more credit losses for banks than what they have already announced from defaults in credit cars, car loans and student loans.

"The U.S. economy was skating on thin ice and the ice is breaking now," Della Casa said. "In general, I would not touch financials because we have got too much writedowns."

Timothy Peach, head of sales Southeast Asia for Man Investments, said that smart managers could make money from short-selling financial stocks.

"I think financial sector would continue to be a great source of opportunity for managers throughout the year. But probably more on the short side for the time being until a time comes when a bottom has been reached," he said.

Della Casa said another profitable trade was to bet on a steepening in U.S. bond yield curve, as he expects interest rate cuts by the Federal Reserve to bring down the short-end debt yields while inflation to continue pushing long-end bonds yields higher.

"We could see much steeper yield curve and if that happens it would be a good sign that the market is working," he said.

The two-year treasury yield <US2YT=R> after recently dipping to 1.99 percent, lowest since 1999, were last trading at 2.07 percent. The benchmark 10-year yield <US10YT=R> was at 3.52 percent, taking the 2-10 year spread to its widest level since late 2004.