(Adds quotes from Peters, bond flow background, paragraphs 2-6;
By Jennifer Ablan
May 21 Greg Peters, the former Morgan Stanley
chief global asset strategist who sounded an early alarm about
the financial crisis, said on Wednesday there is currently a
remote chance of another U.S. recession but bond yields are
signaling a troubling scenario.
Peters, now a senior portfolio manager who helps manage over
$418 billion in assets at Prudential Investments, told Reuters
that another recession, "is not off the table completely. The
market is telling you that probability is higher today than six
The yield on the benchmark 10-year Treasury bond has dropped
conspicuously to 2.53 percent from 3 percent at the start of the
Peters says fundamental factors, led by slowing growth, are
pushing yields lower. Prudential's official GDP estimate is 2.9
percent this year but the firm is moving the guidance lower.
"You can see that the bond market is not buying 3 percent
GDP growth." Indeed, taxable bond funds attracted $4.4 billion
in new money in the week ended May 14, marking their 10th
straight week of inflows.
Peters said he favors double-B-rated junk bonds over U.S.
equities as valuations look better in the high-yield market with
5 percent-plus yields. He also added that emerging market debt
securities look "interesting" as Mexico continues to look
attractive relative to other countries even at relatively tight
spread levels. He also likes Brazilian local-debt markets.
"In addition, we continue to find value in structured
product such as CMBS, CLOs and certain ABS," Peters said.
Peters warned in November 2007 that there was a greater than
50 percent chance that mortgage losses would cause a systemic
shock that would bring the financial system to a "grinding
(Reporting By Jennifer Ablan; Editing by Chris Reese and Tom