Pimco’s El-Erian Favors Brazil’s Bonds, Chinese Yuan

 Mohamed A. El-Erian, whose company runs the world’s biggest mutual fund, favors investments in emerging markets on expectations they’ll outpace developed economies in growth and wealth.

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

Pimco portfolio managers are reducing their riskiest positions, said El-Erian, who shares his job title with Bill Gross. Debt strains in Greece, Portugal and Spain, along with the emphasis on non-developed markets, underscore Pimco’s view that 2010 will be a year of slower-than-average growth and a shrinking global role for the U.S. economy.

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

The next six months will be healthy for the U.S. economy, though the expansion may slow after that, El-Erian said.

‘Big Difference’

The U.S. will be able to withstand investor aversion to sovereign risk better than other nations, El-Erian said at an earlier press conference today during his trip to Sydney for a Reserve Bank of Australia symposium.

“It makes a big difference if you are the reserve currency,” he told reporters at the press conference. “It makes a big difference if you are the provider of the deepest and most predictable financial markets.”

Gross’s $210 billion Total Return Fund handed investors a 15 percent gain in the past year, beating half of its competitors, according to data compiled by Bloomberg.

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

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

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

Loosen Controls

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

China’s economy will expand 6 percent or more in the coming years, El-Erian said in today’s press conference.

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

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

Seven-Week Low

Ten-year Treasury yields fell to 3.53 percent on Feb. 5, the lowest in seven weeks. The 3.375 percent security due November 2019 yielded 3.60 percent as of 8:47 a.m. in London.

“As the sovereign risk moves out, it will have an impact on adjacent products,” El-Erian said at the press conference. “We have been selling certain corporates that we simply believe are too rich for this environment.”

The comments reiterate those from Paul McCulley, a member of the Pimco investment committee, who wrote in a report last month that the company is reducing risk.

Pimco calls its forecast for an extended period of lower- than-average economic growth the “new normal.”

The extra yield investors demand to own corporate debt instead of government bonds widened four basis points last week to 169 basis points, the most since the period ended Nov. 27, according to the Bank of America Merrill Lynch Global Broad Market Corporate Index.

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