Central banks seek bonds, but not Treasuries: UBS

A U.S. Treasury bond in an image courtesy of the Department of the Treasury. More than two-thirds of central banks around the world said they would buy more bonds other than U.S. Treasuries in the next 12 months to earn higher yields, a survey conducted by Swiss bank UBS AG found.

NEW YORK (Reuters) - More than two-thirds of central banks around the world said they would buy more bonds other than U.S. Treasuries in the next 12 months to earn higher yields, a survey conducted by Swiss bank UBS AG found.

Just 3 percent of the 90 central banks surveyed said they invested only in Treasuries, down from 31 percent five years ago as they diversified foreign currency reserves, UBS said in a June 5 report detailing the poll.

"Central banks have become increasingly focused on maximizing long-term total return while controlling risk," UBS mortgage analysts, led by Laurie Goodman, said in the report.

The survey may add to concerns that China would soften its support of U.S. government securities at a vulnerable time for Treasury debt investors. Benchmark 10-year yields soared on Thursday above 5 percent for the first time in almost a year amid signs that interest rates around the world are rising. Until this week, most Wall Street bond dealers had bet the Federal Reserve would lower rates this year.

UBS, one of the dealers that trade with central banks, claimed its survey conducted "just prior" to its June 4 UBS Central Bank Conference covers 91 percent of reserves under management. Central banks, led by China's, hold $5.7 trillion in reserves.

Assets from oil exporting countries that are invested like reserves add up to another $2.5 trillion, UBS said.

Speculation that China will spread out its $1.12 trillion in reserves away from the United States was fanned in March after the country's central bank said it was setting up a separate fund to help manage its holdings.

It is likely central banks will simply diversify within dollar-denominated assets rather than divest from the U.S. currency altogether, the poll found.

The fear that central banks will sell dollars "is far overblown, as much of the reallocation has already been done," the UBS analysts wrote.

Mortgage- and other asset-backed securities are among the bonds that central banks said they had increased authority to buy, the survey said. Fifty-two percent of banks said they could buy MBS and ABS, up from 44 percent last year and 22 percent five years ago, it said.

Approvals of German pfandbriefe, a type of mortgage security, rose to 58 percent from 50 percent last year.

Central banks boosted only slightly their approval of investing in debt of U.S. companies. The poll found 41 percent could buy corporate debt in 2007, up from 40 percent last year. Corporate debt of government-chartered companies such as Fannie Mae and Freddie Mac -- known as agency debt -- was on the approved list of 86 percent of the banks, compared with 84 percent in 2006.

Asset-backed securities, whose collateral is dominated by risky U.S. mortgages, were cited most frequently for increased allocations, UBS said. Twenty-four percent of banks said they would buy more ABS, more than the 22 percent for "covered" bonds -- a type of mortgage bond most popular in Europe -- and 19 percent for agency debt.

Another 18 percent said they wanted to buy more mortgage securities whose payments are guaranteed by Fannie Mae and Freddie Mac. Fewer said they would buy emerging market debt, inflation-indexed bonds and corporate bonds.