Pacific Investment Management Co (Pimco), which runs the world’s biggest bond fund, said the global economy faces a “second wave” of turmoil unless governments adopt larger spending plans.
“The economic setback is still in its early stages,” Koyo Ozeki, head of Asia-Pacific credit research at Pimco’s Tokyo office, wrote in a report on the firm’s Web site.
“Any further decline in housing prices could accelerate the downturn, intensifying the pernicious feedback loop and possibly leading to a second wave in the financial crisis in the next six to 12 months,” he wrote.
The lack of specifics in US Treasury Secretary Timothy Geithner’s financial rescue plan triggered a 4.9 percent drop in the Standard & Poor’s 500 Index on Tuesday, the steepest since US President Barack Obama’s inauguration.
IMF managing director Dominique Strauss-Kahn said on Saturday that advanced economies are in a “depression” that may get worse.
Ozeki said earlier this month that investors might want to hold off buying Japanese corporate debt until yields rise to reflect the full extent of the slump.
Pimco is also avoiding longer-maturity bonds elsewhere in Asia as governments increase spending, Douglas Hodge, managing director for the region, said in an interview on Tuesday.
Bill Gross, Pimco’s co-chief investment officer, said last Thursday that the US Federal Reserve will have to buy Treasuries to curb yields as debt sales increase.
“To overcome that second wave, governments worldwide would have to spend vast quantities,” Ozeki wrote. “The resulting erosion in their finances would increase the risk of dangerous side effects.”
“The worst cannot be ruled out,” Strauss-Kahn said in Kuala Lumpur, where he was attending a gathering of central bankers from Southeast Asia. “There’s a lot of downside risk.”