Barclays Capital: Europe weighs on investors' minds, bond rates to stay low through 2012

By Andrea Heisinger

New York, June 21 - Europe will continue to affect the bond market as it has for much of 2012, sources from Barclays Capital said at a global outlook press briefing on Thursday.

"Europe's been center stage, and we think that's going to continue," said head of research Larry Kantor.

Investors have become skeptical of seeing a solution that has caused massive capital flight out of the euro zone area, Kantor said.

"It's tightened capital, and that's the most dangerous. These countries really lost access to the markets."

Kantor later said that Barclays is "still not ready to go into Europe" and that the "tempting thing in this environment is to tell investors to run for cover."

The speed of the rally in bonds during the past three months surprised head of rates and securitized products research Ajay Rajadhyaksha.

"Not only that, but 30-year Treasuries have hit all-time lows," he said, referring to yields. Rates should stay close to these levels for the last quarter of 2012, he added.

Reasons for the rate stability include slower growth in the United States' economy, a "paucity of competition" for U.S. Treasuries and a shrinking of supply and rise in demand for Treasury bonds that has "forced people into the arms of high-grade securities at the expense of loans," Rajadhyaksha said.

"The bond market is likely to remain very nervous," he said, adding that this was also because although the focus is on Europe, the U.S. is approaching a fiscal cliff at the end of 2012.

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