Schroders warns of "painful" future for Treasuries

LONDON (Reuters) - The biggest bubble currently building with investors is in U.S. Treasuries, which may be set for a painful repricing over the next few years, a leading global investor said on Wednesday.

Alan Brown, who as group chief investment officer of Schroders steers around 110 billion pounds in assets worldwide, said that although he did not expect the long-dated U.S. bond market to fracture anytime soon, it was not priced for any kind of economic recovery.

"The next bubble has already been created in the long-end of the Treasury market," he told Reuters.

The 10-year U.S. Treasury bond was yielding around 2.88 percent on Wednesday, a level reached by rising demand from investors seeking safety from stock market falls, and from overseas governments recycling their trading profits.

Brown said that over time the U.S. economy was likely to have trend GDP growth of around 2.5 percent, less than before the recession.

Add to that mild inflation of 2.00 percent and another 1.50 percent to reflect a premium over short-dated bonds and you get a needed 6 percent yield for such paper to be attractive.

Brown said that the eventual move away from current levels could prove "painful" and that this would be especially so if inflation rises more than expected.

The potential is there for that, he said, noting that central banks were unlikely to jump quickly to tighten monetary policy at the first signs of inflation for fear of crushing any nascent economic growth.

DOWNBEAT ON EQUITIES

But if Schroders is concerned about U.S. Treasuries, it is by no means bullish on equities. It has cut back on its underweight position recently as stocks have risen, but remains convinced that the gains are a short-lived bear market rally.

Within equities it is overweight on U.S. stocks but underweight Europe and emerging markets, although Brown said he would move back into the latter as soon as he became more optimistic.

Schroders, in the meantime, likes corporate debt, both investment grade and high yield.