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Mickelson plays on amid news of U.S. probe into possible insider trading


NEW YORK (Reuters) – DUBLIN, Ohio May 31 (Reuters) – If golf star Phil Mickelson is concerned by a federal probe into possible insider trading involving him, billionaire investor Carl Icahn and Las Vegas gambler William Walters, he did not show it on Saturday.

As he hit a few practice balls before his round at the Memorial Tournament in Dublin, Ohio, Mickelson was in a light-hearted exchange with fellow American golfer Robert Garrigus.

“How’s it going, Phil?” asked Garrigus.

“It’s been an interesting evening,” Mickelson replied, adding with a laugh, “I don’t have much to say about it.”

Garrigus jokingly intimated that talking with Mickelson could get him into trouble, saying he was “not sure I want to talk to you now.”

On Friday night, a source familiar with the matter said the FBI and the U.S. Securities and Exchange Commission were investigating possible insider trading involving Icahn, Mickelson and Walters.

Federal investigators are looking into whether Mickelson and Walters may have traded illegally on private information provided by Icahn about his investments in public corporations, the source told Reuters, confirming reports on Friday.

None of the three men has been accused of any wrongdoing, the source said.

Mickelson, 43, a three-times Masters champion, winner of 42 tournaments on the PGA Tour and one of the world’s highest-paid athletes, said in a statement issued through his manager early on Saturday: “I have done absolutely nothing wrong. I have cooperated with the government in this investigation and will continue to do so.”

He declined to elaborate with reporters after his round at the tournament on Saturday, saying: “Hopefully shortly we will be able to discuss this further, but for right now I can’t.”

The Wall Street Journal cited Glenn Cohen, Mickelson’s lawyer, as saying the golf star was not a target of the federal probe.

There was plenty of support among fans at the tournament, with members of the crowd shouting: “Go Phil!” and “We’re here for you, Phil.”

Some fans, however, were dismayed at news of the probe.

“Phil is the everyman’s man, even though he’s mega-rich,” said David Hughes, of Los Angeles. “He shares his wealth with great causes, thrills thousands of fans almost every week and with all the wolves of Wall Street, they want to go after him? Give me a break.”

Icahn, an activist investor, told Reuters he was unaware of any investigation and said his firm always followed the law. He acknowledged a business relationship with Walters, but said he did not know Mickelson personally.

“I am very proud of my 50-year unblemished record and have never given out insider information,” Icahn said.

Walters and Mickelson play golf together, the source familiar with the investigation told Reuters.

Walters did not respond to requests for comment. Officials with the FBI and the SEC declined to comment.

WEALTHY GOLFER

Mickelson, a native of California who took up the game as a toddler, has piled up career earnings of more than $73 million and considerably more via corporate endorsements and his golf course design company.

According to Forbes, he is seventh on its list of the world’s highest-paid athletes, second only to Tiger Woods among golfers. In the 12 months to July 2013, his total earnings were $48.7 million, Forbes said.

His sponsors include Barclays PLC BARC.L, Exxon Mobil Corp XOM.N, KPMG and Amgen AMGN.O. Barclays and Exxon Mobil declined to comment on the insider trading probe and many of his other top sponsors could not be reached for comment.

The player clinched his fifth major title at last year’s British Open. If he wins next month’s U.S. Open, it would complete a career grand slam of the four majors.

Asked if he could put the probe past him leading into the U.S. Open, Mickelson said: “Yes I do. you know as a player you have to be able to block out whatever is going on off the golf course and focus on the golf course and it’s not going to change the way I carry myself.

“Honestly I have done nothing wrong. I am not going to walk around any other way.”

YEARS OF INVESTIGATING

The insider trading investigation began three years ago, according to the source. It is the latest to emerge from a multi-year insider trading crackdown by U.S. authorities.

The investigation centers on suspicious trades in Clorox Co CLX.N by Walters and Mickelson as Icahn was trying for access to the board of the consumer products company in 2011, the New York Times reported, citing people briefed on the probe.

Icahn had accumulated a 9.1 percent stake in Clorox in February 2011. In July, he made an offer for the company that valued it at above $10 billion and sent its stock soaring.

Investigators were also looking into trades that Mickelson and Walters made related to Dean Foods Co DF.N, the Journal cited the people as saying. The New York Times cited people briefed on the investigation as saying that in that particular case, investigators were looking into trades placed around 2012, just before the company announced quarterly results.

Those trades appeared to have no connection to Icahn, the newspaper added. Icahn told Reuters he had never purchased shares or been involved with Dean.

Federal prosecutors in Manhattan are handling the inquiry in conjunction with the FBI and the SEC, the New York Times reported. Since August 2009, Manhattan U.S. Attorney Preet Bharara’s office has convicted 81 people of insider trading, either at trial or via guilty pleas, with no acquittals.

The current investigation made little headway initially, the Times reported. Investigators are searching phone records, seeking to determine whether Icahn had spoken to Walters before the trades, the Times cited anonymous people briefed on the probe as saying.

About a year ago, FBI officials approached Mickelson at Teterboro Airport in New Jersey, asking him to discuss his trading, the Times cited its sources as saying.

Icahn, a prolific tweeter and vocal critic of some of America’s largest corporations, habitually broadcasts his thoughts on corporations and, occasionally, stock positions he has taken.

Even if Icahn did leak information about his plans regarding Clorox, it may not necessarily have violated the law. Insider trading regulations prohibit trading based on material, nonpublic information obtained from someone who breached a fiduciary or confidentiality duty by disclosing it.

(Additional reporting by Jennifer Ablan and Mark Lamport-Stokes; Writing by Edwin Chan and Frances Kerry; Editing by Peter Henderson, Gunna Dickson and Peter Cooney)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/cqud11m94Lg/story01.htm

BlackRock’s Fink jolts ETF business with ‘blow up’ warning


(Reuters) – BlackRock Inc Chief Executive Larry Fink this week dropped a stink bomb on a small corner of the $2.5 trillion global market for exchange-traded funds.

Fink, who runs the world’s largest asset manager and ETF provider, said structural problems with leveraged ETFs have the potential to “blow up the whole industry one day.” Sponsors of leveraged ETFs and related products, which make up only about $60 billion of global industry assets, called his remarks an exaggeration.

Leveraged ETFs use derivatives and debt in an attempt to enhance returns – often by two or three times – that an investor would receive from putting money in stocks, bonds or other financial instruments. The only problem: if the underlying securities or indexes drop, the losses can be fast and heavy.

Fink, who was speaking at a Deutsche Bank conference in New York, drew parallels between the embedded leverage in some ETFs and two obscure Bear Stearns hedge funds that collapsed in 2007. That ignited an initial wave of panic over Wall Street’s exposure to sketchy mortgages – a warning of much worse to come in the 2008 financial crisis.

A systemic risk could emerge from packaging inherently hard-to-trade securities, such as leveraged bank loans, into ETFs. The value of the ETF could collapse if the market for the underlying assets freezes up. That could touch off a rout within the ETF industry if skittish investors decide that many other funds are too dangerous for them.

Fink’s pointed remarks on Wednesday also raised questions about whether too many risky financial products are entering the marketplace.

In the aftermath of the financial crisis, a growing number of complicated and risky products are being aimed at Main Street investors. Hedge funds are making some of their strategies available to Mom and Pop investors willing to come up with as little as $1,000. Part of the pitch is that they need to look beyond plain vanilla investments if they want to have enough money to retire – the downside is that they could lose their shirts if markets take a sharp turn.

FED WARNED

Last month, top money managers aired their concerns during a meeting with New York Federal Reserve President William Dudley.

The group, including hedge fund manager David Tepper of Appaloosa Management LP, worried aloud that investors may be stretching too far for returns in a low volatility, low interest rate environment, prompting “some market participants to take on additional leverage to meet investment targets,” according to recently released minutes from the April 10 meeting of the Fed’s Investor Advisory Committee on Financial Markets.

Fink on Wednesday suggested there’s systemic risk lurking in leveraged ETFs, in comments that resonated with some other investors.

“I agree with the notion that the leveraged ETFs have the potential to possibly be very upsetting to the market. It is the leverage that concerns me.” said Dan Fuss, vice chairman of Loomis Sayles.

Fink said U.S. and European regulators, including the U.S. Securities and Exchange Commission, don’t pay enough attention to individual financial products hitting the market.

The SEC in 2012 stopped giving new applicants permission to launch leveraged ETFs, because it was concerned about such funds. However, two fund sponsors – ProShares and Direxion – are still launching leveraged ETFs, using exemptive relief issued by the securities watchdog earlier. The SEC declined to comment on what Fink said.

Fink, whose firm oversees $4.4 trillion in client assets, declined to comment for this story.

BlackRock’s iShares ETFs owned 39 percent of the global ETF market with $953 billion in assets at the end of April. State Street Corp was a distant No. 2 with $409 billion in assets, followed by No. 3 Vanguard Group’s $368 billion.

None of those three offer leveraged ETFs. Vanguard and State Street executives said they don’t share Fink’s view that the products pose a systemic risk.

Dave Mazza, head of ETF research for State Street Global Advisors, said, “This is an extreme example of buyer beware.” He said it is possible a leveraged ETF meltdown could disrupt industry-wide compound annual growth rates that have topped 25 percent in recent years.

“These products work as advertised,” said Joel Dickson, Vanguard’s senior ETF strategist. “Now, whether investors understand how they work is an education issue.”

Meanwhile, top leveraged ETF providers denounced Fink’s comments.

“Direxion Investments completely reject his contention that leveraged ETFs pose a systemic risk,” the company said in a statement. As of this week, the gross assets in 140 leveraged ETFs run by Direxion and rival ProShares totaled $22 billion.

The Direxion Daily Gold Miners Bull 3X Shares fund is one of the hottest leveraged ETFs on the market, attracting $1.07 billion in net flows from investors over the past 12 months, according to Lipper Inc, a unit of Thomson Reuters.

A three times leveraged ETF like Direxion’s gold miners fund has $2 of leverage for every $1 of capital invested in the product. The ETF is rebalanced daily to maintain the same ratio of capital to exposure each day. This means, as Direxion explained, that leveraged ETFs respond to losses by reducing exposure.

“It is hard to understand how Mr. Fink could conclude that a relatively small, highly liquid, completely transparent suite of products, which systematically reduce risk in response to losses, could generate systemic risk,” Direxion said.

But Fink said this week that an inherently illiquid asset doesn’t become more liquid because it is wrapped inside a leveraged ETF fund.

“We will not do a bank loan ETF,” Fink said at the Deutsche Bank conference. “Why? We believe that the underlying asset is far less liquid than daily liquidity of an ETF. And you know as a banker, sometimes a bank loan market freezes.”

(Reporting By Tim McLaughlin; Additional reporting by Douwe Miedema; Editing by Richard Valdmanis and Martin Howell)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/uvK3wbO4IdI/story01.htm

Europe needs to stick to reform path to secure growth: ECB’s Mersch


FRANKFURT (Reuters) – European policymakers should not give up on efforts to make their economies more efficient and stick to budget rules, despite a strong protest vote in European Parliament elections, the ECB’s Yves Mersch said on Saturday.

With far-right, anti-EU parties sweeping to unprecedented victories in France, Britain and Denmark and populists gaining ground elsewhere, political leaders face tough questions about the future direction of European integration.

Mersch, a member of the European Central Bank’s Executive Board, said it was essential to move ahead with structural reforms now, to finish what was started in 1999 and make the euro zone work.

Otherwise, he said, “on our current reform-resistant course, I see a distant but distinct probability that (economic) growth in the euro area begins a secular downward drift”. Most estimates found that potential euro zone growth had diminished during the crisis.

“This is why moving ahead with structural reform is essential,” Mersch said in the text of a speech.

“We have done much to stabilize the euro area with banking union and other reforms; but now we need to find ways to make the euro area sustainably grow.

“Voters in Europe have overall given policymakers a mandate to do this; we have a pro-European majority in Parliament. If we do not seize this mandate, however, they may not provide another one,” said Mersch.

(Reporting by Eva Taylor; Editing by Ruth Pitchford)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/RGbLtegmtIE/story01.htm

Air New Zealand to place new Airbus jet order: sources


DOHA (Reuters) – Air New Zealand is close to placing an order for around a dozen A320-family aircraft worth well over $1 billion at list prices to expand its fleet of mainly Airbus medium-haul jets, industry sources said on Saturday.

The deal, which could be announced on the sidelines of a global airlines meeting in Doha on Sunday, is the latest step in the airline’s fleet renewal programme that will also see it soon introduce the latest version of Boeing’s 787 Dreamliner .

Airbus has called a news conference to announce an airplane order on Sunday, but declined to give further details. Air New Zealand did not immediately respond to a request for comment.

The announcement comes as the International Air Transport Association, whose 240 airline members include Air New Zealand’s Tasman partner Virgin Australia and its main rival Qantas, prepares to hold meetings from June 1 to 3.

Air New Zealand operates mainly Airbus short- and medium-haul aircraft and Boeing long-haul aircraft. It has been evaluating the latest offering from Airbus, the A320neo, against the competing Boeing 737 MAX for use on trans-Tasman routes – where it competes with Qantas unit Jetstar in partnership with Virgin Australia, of which it owns around 25 percent. In 2009, it ordered 14 Airbus A320 jets to replace Boeing 737-300 models and placed options for a further 11 including the possibility of taking the larger A321. Its Airbus order tally has since edged up to 15, of which it has already taken 10. It is also the launch customer for the Boeing 787-9, a bigger version of Boeing’s carbon-composite Dreamliner. It is due to take first delivery in the middle of the year to phase out older Boeing 767s, fitting into its network for Asian routes alongside the bigger Boeing 777 serving North America.

(Reporting by Tim Hepher; Editing by Victoria Bryan)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/K4QhVfm-Zhs/story01.htm

U.S. investigating Icahn, Mickelson in insider trading probe: source


NEW YORK (Reuters) – The U.S. Federal Bureau of Investigation and the Securities and Exchange Commission are investigating possible insider trading involving billionaire investor Carl Icahn, golfer Phil Mickelson and Las Vegas gambler William Walters, a source familiar with the matter said.

Federal investigators are looking into whether Mickelson and Walters may have traded illegally on private information provided by Icahn about his investments in public corporations, the source told Reuters, confirming reports on Friday.

Icahn, a legendary activist investor, told Reuters that he was unaware of any investigation and said that his firm always followed the law. He acknowledged a business relationship with Walters but said that he did not know Mickelson personally.

“I am very proud of my 50-year unblemished record and have never given out insider information,” he said.

Walters and Mickelson play golf together, the source familiar with the investigation told Reuters.

Walters did not respond to requests for comment. Spokespeople for Mickelson, the FBI and the SEC declined to comment. The Wall Street Journal cited Glenn Cohen, Mickelson’s lawyer, as saying the golfing legend was not a target of the federal probe.

None of the three men have been accused of any wrongdoing, the source told Reuters.

YEARS OF INVESTIGATING

The investigation began three years ago according to the source. It is the latest to emerge from a multi-year crackdown on insider trading by U.S. authorities.

The investigation centers on suspicious trades in Clorox Co by Walters and Mickelson as Icahn was trying for access to the board of the consumer products company in 2011, the New York Times reported, citing people briefed on the probe.

Icahn had accumulated a 9.1 percent stake in Clorox in February 2011. In July, he made an offer for the company that valued it at above $10 billion and sent its stock soaring.

Investigators were also looking into trades that Mickelson and Walters made related to Dean Foods Co, the Journal cited the people as saying. The New York Times cited people briefed on the investigation as saying that in that particular case, investigators are looking into trades placed around 2012 just before the company announced quarterly results.

Those trades appeared to have no connection to Icahn, the newspaper added. Icahn told Reuters he had never purchased shares nor been involved with Dean.

MAKING HEADWAY

Federal prosecutors in Manhattan are handling the inquiry in conjunction with the FBI and the SEC, the New York Times reported. Since August 2009, Manhattan U.S. Attorney Preet Bharara’s office has convicted 81 people of insider trading, either at trial or via guilty pleas, with no acquittals.

The current investigation made little headway initially, the Times reported. Investigators are searching phone records, seeking to determine whether Icahn had spoken to Walters before the trades, the Times cited anonymous people briefed on the probe as saying.

And about a year ago, FBI officials approached Mickelson at Teterboro Airport in New Jersey, asking the celebrity golfer to discuss his trading, the Times cited its sources as saying.

Icahn, a prolific tweeter and vocal critic of some of America’s largest corporations, habitually broadcasts his thoughts on corporations and, occasionally, stock positions he has taken. The billionaire took to Twitter earlier this year when he pushed Apple Inc’s board to expand the iPhone maker’s buyback program, and several times tweeted when he had increased his position in the tech company.

During a campaign to get eBay Inc to hive off its fast-growing PayPal division, he openly criticized the Internet retail giant’s board. But the activist investor has tweeted just once in the past three weeks.

Even if Icahn did leak information about his plans regarding Clorox, it may not necessarily have violated the law. Insider trading regulations prohibit trading based on material, nonpublic information obtained from someone who breached a fiduciary or confidentiality duty by disclosing it.

As a non-board member, Icahn owed no duty to Clorox shareholders. It is possible, though by no means definite, that Icahn owed a confidentiality duty to his own shareholders.

(Reporting by Jennifer Ablan; Writing by Edwin Chan; Editing by Peter Henderson)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/cqud11m94Lg/story01.htm

Online banking thefts hit Japan firms prompting compensation rethink


TOKYO (Reuters) – Hackers stole nearly $2 million from the online bank accounts of Japanese businesses in April, a surge in theft that has prompted some banks to curtail online services and rethink compensation policies, executives and regulators say.

In April there were 50 cases of theft from online accounts held by Japanese businesses with nearly 200 million yen stolen, according to a person with knowledge of the industry-wide tally, which has not been made public. That was more than the entire previous year.

Japanese businesses reported 34 cases of online banking theft for the year ended March with a total of 182 million yen ($1.8 million) stolen, according to data released by the Japanese Bankers Association.

Earlier this month, a senior official with Japan’s Financial Services Agency told regional bank executives that regulators were concerned that online theft could cause a chain of small business failures and bankruptcies, according to participants who attended the closed-door meeting.

Mitsubishi UFJ Financial Group and Mizuho Financial Group said their corporate customers had been hit by online thefts. Top regional lenders such as Fukuoka Financial Group and Bank of Yokohama also said their clients had also experienced losses.

Corporate users of online banking in Japan tend to be small businesses and family-owned firms. In a typical theft, hackers trick owners into surrendering passwords or gain control of poorly protected computer systems to make transfers out of their accounts, industry officials and security experts said.

“This has become a serious problem,” Masaaki Tani, president of Fukuoka Financial Group, the largest regional bank, said earlier this month.

It was not clear why cases of such theft had increased so rapidly although bankers elsewhere have warned of a growing threat from hackers. “Cybersecurity attacks are becoming increasingly complex and more dangerous,” JPMorgan Chase Co Chief Executive Jamie Dimon said in a letter to shareholders in April.

Japan’s banks are divided on how to respond. Promising compensation might remove an incentive for businesses to tighten security, some executives say. At the same time, tightening security too much could kill the convenience of online banking.

In April, many regional banks suspended a service which allowed clients to transfer money on the spot to accounts that were not pre-registered. Chiba Bank reduced its online transfer limit to 10 million yen, from just under 100 million yen.

Until now, the question of whether to compensate businesses for online theft has been left to each bank. Most offer fewer protections than they do for individual accounts.

Resona Bank has said it will compensate business clients for Internet losses of up to 50 million yen when customers have taken appropriate security measures.

The lender is part of Resona Holdings, Japan’s fourth-largest banking group by assets. Resona’s pledge is part of a push to build its business, including lending, to small- and medium-sized businesses at a time when overall loan demand remains weak.

($1 = 101.6050 Japanese Yen)

(Reporting by Taiga Uranaka; Additional Reporting by David Henry in New York; Editing by Jeremy Laurence)

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Valeant boosts $53.8 billion Allergan bid as Ackman opts for stock


(Reuters) – Valeant Pharmaceuticals International Inc said on Friday it would boost its takeover bid for Botox-maker Allergan Inc for the second time this week, contingent on the two sides negotiating.

Laval, Quebec-based Valeant said it would pay $72 in cash – up from $58.30 on Wednesday – and 0.83 share of Valeant stock for each Allergan share. The revised, unsolicited offer was triggered by Pershing Square, the hedge fund controlled by Bill Ackman that is Allergan’s biggest shareholder, agreeing to take only stock in Valeant for its Allergan shares.

The offer is worth $53.8 billion, up from Wednesday’s $49.9 billion bid.

Allergan shares closed 5.7 percent higher at $167.46 while Valeant shares ended 1.5 percent higher at $131.21.

BMO analyst David Maris said the revised offer will fall short, adding it seemed “odd and erratic” that Valeant would raise the bid two days after its chief executive, Mike Pearson, promised not to negotiate against himself.

“It makes investors scratch their heads when a new bid comes in before the ink is dry on the previous one,” Maris said.

But analyst Ronny Gal of Bernstein Research said the offer increases pressure on Allergan to take action to raise the company’s value and also to negotiate with Valeant.

“The offer now appears credible,” he said. “We do not think this is a ‘done deal’ by a long shot, but obviously the likelihood of success is higher now.”

Allergan said in a statement that it plans to consider Valeant’s latest proposal once it receives it. It is best known for its Botox medicine, which is injected into muscles to smooth wrinkles. Ackman said he called Pearson on Friday morning and offered to take stock for his Allergan shares if Pearson increased the cash offer to other shareholders. “We believe that our gesture to the other Allergan owners makes an extraordinarily strong statement about our belief in the long-term value of this highly strategic business combination,” Ackman said in a statement.

The deal value is based on Allergan’s 303.5 million diluted shares outstanding as of March 31, 2014, and Ackman’s holding of 28,878,638 shares. Along with cash and shares, it also includes the possibility of additional payments worth up to $7.6 billion related to future sales of an experimental eye drug.

Valeant on Wednesday raised the cash component of its bid for Allergan, but the offer disappointed and both stocks dropped.

Buying Allergan would push Valeant closer to its goal of becoming a top-five pharmaceutical company by market cap before the end of 2016, although Pearson also mused on Wednesday about potentially breaking up the company.

Allergan has criticized the sustainability of Valeant’s rapid growth through acquisitions, which included contact lens maker Bausch + Lomb last year.

(Reporting by Rod Nickel in Winnipeg, Manitoba; Ransdell Pierson and Caroline Humer in New York; editing by Marguerita Choy, Matthew Lewis and Prudence Crowther)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/_ZOdW8vRQMM/story01.htm

Fed officials say rates should not be used to fight bubbles


PALO ALTO Calif. (Reuters) – A trio of Federal Reserve officials who disagree deeply with one another over the appropriate stance of monetary policy on Friday expressed a shared distrust for using interest rates to head off asset bubbles and other forms of financial instability.

Both Richmond Fed President Jeffrey Lacker, a policy hawk, and San Francisco Fed President John Williams, a centrist, told reporters after a policy conference here that they would not want to risk unmooring the public’s expectation that inflation will rise back to the Fed’s 2 percent goal in the next few years.

That, Williams said, is what appears to have happened in Sweden and Norway after those countries raised rates to address financial stability risks. Fed economist Andrew Levin had shown a slide making that point earlier at a presentation that both policymakers attended.

Chicago Fed President Charles Evans, one of the Fed’s most ardent doves, echoed those sentiments.

“Degrading monetary policy tools to mitigate financial instability risks would lead to inflation below target and additional resource slack,” Evans said in slides released Friday for a talk he is set to give in Istanbul on Monday.

The role financial instability concerns should play in Fed policymaking has long been a subject of debate at the U.S. central bank. Over the past year, Fed Governor Jeremy Stein has argued strongly that there may be times when the Fed should raise rates to stamp out potential bubbles.

Stein left the Fed earlier this week to return to his post at Harvard University, leaving the Fed without a forceful public advocate of that idea.

Philadelphia Fed’s Charles Plosser told reporters on Friday he was “kind of on the same page” as Williams and Lacker, in terms of rejecting a financial stability mandate for the Fed.

But he added that he is worried about the risk that the Fed’s extraordinarily easy policies over the past five years themselves could stoke financial instability.

Williams, Lacker and Plosser were in Palo Alto attending a central banking conference put on by Stanford University’s Hoover Institution that also featured Kansas City Fed President Esther George.

On Friday, Williams reiterated his view that rates, near zero since December 2008, should not rise until next year and should do so only slowly. That’s the view also of Fed Chair Janet Yellen, who has said rates will stay low for a “considerable time” after the Fed winds down its bond-buying program this coming fall.

Lacker said he would support an immediate tightening of monetary policy by selling the Fed’s holdings of mortgage-backed securities, but added that the size of the Fed’s balance sheet will not prevent it from carrying out proper monetary policy.

Plosser said he would be open to varying approaches toward trimming the Fed’s massive balance sheet, which now tops $4 trillion after years of stimulative bond-buying, but said his preference is for an eventual return to a smaller balance sheet.

(Reporting by Ann Saphir)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/jmKNavEpVkc/story01.htm

U.S. bond market faces possible reckoning


NEW YORK (Reuters) – The rally in U.S. Treasury bonds surprised many, taking 10-year yields to their lowest levels in 11 months. Jobs data and the European Central Bank meeting next week will determine whether bond prices have further to go.

The bond market’s rally is the result of a confluence of factors – falling yields in Europe, extra demand from pension funds, concerns among investors about long-term economic demand and technical factors, including short-covering from those who thought bond yields were headed higher.

Prices have jumped, pushing the yield on benchmark 10-year U.S. Treasuries Thursday to 2.422 percent, the lowest since last June, despite the U.S. Federal Reserve’s easing back on its bond-buying stimulus program.

Investors aren’t convinced that the Fed is cutting stimulus because of an impending surge in growth. Instead, they’re more worried about weak economic indicators and a lack of inflation, which could change in the case of a strong jobs report or data showing price gains.

Since it’s far from certain how the jobs data will come in or how forcefully the ECB will act, the bond market is likely to remain on edge.

David Keeble, global head of interest rates strategy at Credit Agricole Corporate and Investment Bank in New York, said a decent jobs report could “remind us that we have to get back to the reality that the economy is picking up.”

Employers are expected to have added 215,000 workers in May, according to a Reuters poll, following an increase of 288,000 in April, which was the biggest gain since January 2012.

While the labor market continues to heal, it has not been enough to jump-start wages, the most potent factor in kindling inflation concerns.

“The key is wages moving higher and inflationary expectations starting to move higher,” said Quincy Krosby, market strategist at Prudential Financial, based in Newark, New Jersey.

Expectations that the ECB will announce more aggressive action next Thursday to boost the euro-zone economy have also helped drive U.S. and European bond yields down to levels not seen in a year. Benchmarks in Italy and Spain have dropped dramatically, making U.S. rates look attractive by comparison.

Part of the drop in yields stems from investors trying to exit earlier bets on rising yields. Some bond fund managers were stung by a bet on lower five-year note yields and higher 10-year yields, a strategy favored by many hedge funds heading into the year.

“These positions have underperformed so far this year as the yield curve has flattened and bond yields have fallen,” Wells Fargo analysts wrote in a note.

The bond market’s price gains could be far from over, given recent history.

But if the market’s direction reverses and yields move higher, they could do so in rapid fashion.

“It’s like playing a game of Russian roulette with the bond markets right now,” Keeble said. “You know something is going to go ‘bang,’ and you just don’t know when.”

(Reporting by Caroline Valetkevitch; Editing by Jan Paschal)

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