NEW YORK – The world’s bond buyers have turned on Europe’s deeply indebted governments and fled to another deeply indebted government across the Atlantic — the U.S. As a result, U.S borrowing costs have plunged to historic lows while rising rates in Europe have many worried about a catastrophic financial crisis.

The European debt crisis has made the U.S. Treasury market the world’s most popular spot for bond investors. But Kathleen Gaffney, co-manager of the $19.1 billion Loomis Sayles Bond fund, refuses to join them.

Gaffney concedes that over the course of a few months or even a year, it might look like a bad move. The Loomis flagship fund dropped 5 percent in the three months starting in July, while the benchmark bond index gained 3.8 percent. Like bond giant Bill Gross at Pimco, she avoided U.S. government debt and refused to follow the rest of the world into Treasurys this summer. The Treasury rally has pushed the Barclay’s index up 7 percent this year, compared with her fund’s 3 percent gain.

But Gaffney is used to getting the big picture right. The $19.1 billion Loomis Sayles Bond fund she helps manage has rewarded investors with an average 10 percent return each year for a decade. Morningstar and Lipper both rank it in the top tier of bond funds.

So Gaffney plans on sticking to her call. With Treasury yields below 2 percent, U.S. government debt isn’t worth the risk. And what if other bond buyers eventually sour on U.S. Treasurys just as they have European government debt? For now, she’d rather buy corporate junk bonds.

In a recent interview, Gaffney talked to The Associated Press about why she avoids Treasurys, the prospect of another credit-rating cut for the U.S. and the appeal of Canada.

Q: If you could go back in time and get a chance to do it all over again, would you load up on Treasurys and sell them back to everybody else in August?

Nope. Not at all. We’re not trying to win a popularity contest. It’s really about the yield. You’ll never get good long-term returns if you park your money in bonds paying less than 2 percent. The best way to have success is to follow your long-term perspective.

Q: So how much in Treasurys do you hold now? Your benchmark index is about 50 percent Treasurys.

We have no Treasury position in the fund. None of any kind. It’s been that way since March. They’re the least attractive asset class for the long term. They’re return-free (they pay less than the annual rate of inflation). They’re also very risky because rates will eventually go up.

Q: How do you replace U.S. government bonds?

The alternative that we’ve found is Canadian government bonds. They make up about 9 percent of our fund. It’s a deep market. But it’s really the natural resources that we like. Countries that export natural resources such as oil and metals are tied to rising commodity prices. They can protect against inflation. We also like Australia and New Zealand. Like Canada, their government budgets are in sound shape. And they export more than they import.

Q: Will the Congressional supercommittee’s failure to reach an agreement on $1.2 trillion in budget cuts affect the Treasury market? Automatic cuts are supposed to start in 2013, but some Republicans have said they’ll try to stop that from happening.

The concern is what do they do now. I think Congress is going to find a way to repeal the automatic spending cuts. The rating agencies would not look kindly upon that. We’d be looking at another downgrade for U.S. Treasurys. After the downgrade from S&P in August, Treasurys continued to act as a safe haven. This time the market may not be as kind.

NEW YORK (Reuters) – Stocks extended losses on Tuesday, with the Nasdaq briefly falling 1 percent, on European concerns after comments from Germany's Angela Merkel and Moody's said it would review France's credit rating.

The Dow Jones industrial average (.DJI) dropped 60.66 points, or 0.53 percent, to 11,336.34. The Standard & Poor's 500 Index (.SPX)(.INX) lost 3.46 points, or 0.29 percent, to 1,197.40. The Nasdaq Composite Index (.IXIC) fell 13.86 points, or 0.53 percent, to 2,601.06.

(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)

NEW YORK (Reuters) – S&P 500 index futures extended losses on Tuesday as earning from some big U.S. companies such as Bank of America (BAC.N) and IBM (IBM.N) disappointed investors, while Moody's warned on France's credit rating and growth in China slowed.

S&P 500 futures fell 6.5 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures dropped 21 points, but Nasdaq 100 futures dipped 2 points.

(Editing by Jeffrey Benkoe)

LONDON (Reuters) – World stocks hit a 4-1/2 week high on Monday as investors grew confident over global economic prospects after Greece avoided an early debt default and data pointed to a moderate slowdown in China’s growth.

Shanghai stocks hit a six-week high after data last week showed Chinese manufacturing growth moderated in June, raising expectations that the economy may not be heading for a sharp slowdown despite monetary policy tightening.

Over the weekend, euro zone finance ministers approved a 12 billion euro installment of aid for Greece and said the details of a second aid package would be finalized by mid-September.

But the euro erased gains after ratings agency Standard & Poor’s said a debt rollover plan being considered for Greece may still put the country into “selective default.

“Banks effectively own Greece, and Greece, as an asset, is under pressure. I think banks will be under pressure for some time,” said Richard Greenwood, fund manager at Bedlam Asset Management, which manages $700 million.

“However, the companies with pricing power, stable demand and good management will just do their business. Some healthcare and consumer staples will continue to be very stable. M&A activities will also help stocks.”

The MSCI world equity index (.MIWD00000PUS) rose 0.47 percent to hit its highest since June 1.

The benchmark index rose more than 5 percent last week, its biggest weekly gain since July 2010.

European stocks (.FTEU3) gained 0.2 percent while emerging stocks (.MSCIEF) rose 1 percent, helped by Shanghai stocks (.SSEC) which rose nearly 2 percent.

U.S. markets are closed for the Independence Day holiday.

“European markets look much happier than they did just a week ago. Bears have been banished to the sidelines,” said Darren Sinden, senior sales trader at Silverwind Securities.

“We may see some profit-taking across the rest of the week, but that would be as expected given the significant gains posted by major European indices in the last sessions.”

Fund tracker EPFR’s data showed investors piled back into emerging market equity funds in the week to June 29 as hopes that Greece would avoid imminent default encouraged risk taking.

Inflows into global emerging market funds tracked by EPFR hit a 12-week high during the week, following three straight weeks of outflows.

U.S. crude oil was steady at $94.96 a barrel.

The euro fell 0.2 percent to $1.4514 after S&P poured cold water on the euro’s rally, which has also drawn support from expectations that the European Central Bank will raise interest rates at its policy meeting later this week.

Bund futures rose 12 ticks.

The dollar (.DXY) was broadly steady against a basket of major currencies.

Improved appetite for risk and the end of the Federal Reserve’s bond-buying program reduced demand for U.S. Treasury bonds, with yields on 10-year notes settling at 3.18 percent, near its highest in almost two months and adding to a weekly rise of more than 30 basis points.

(Additional reporting by Atul Prakash; Editing by Anna Willard)

LONDON (Reuters) – World stocks hit a 4-1/2 week high Monday as investors grew confident over global economic prospects after Greece avoided an early debt default and data pointed to a moderate slowdown in China’s growth.

Shanghai stocks hit a six-week high after data last week showed Chinese manufacturing growth moderated in June, raising expectations that the economy may not be heading for a sharp slowdown despite monetary policy tightening.

Over the weekend, euro zone finance ministers approved a 12 billion euro installment of aid for Greece and said the details of a second aid package would be finalized by mid-September.

But the euro erased gains after ratings agency Standard & Poor’s said a debt rollover plan being considered for Greece may still put the country into “selective default.

“Banks effectively own Greece, and Greece, as an asset, is under pressure. I think banks will be under pressure for some time,” said Richard Greenwood, fund manager at Bedlam Asset Management, which manages $700 million.

“However, the companies with pricing power, stable demand and good management will just do their business. Some healthcare and consumer staples will continue to be very stable. M&A activities will also help stocks.”

The MSCI world equity index (.MIWD00000PUS) rose 0.4 percent to hit its highest since June 1.

The benchmark index rose more than 5 percent last week, its biggest weekly gain since July 2010.

European stocks (.FTEU3) gained 0.2 percent while emerging stocks (.MSCIEF) rose nearly 1 percent, helped by Shanghai stocks (.SSEC) which rose nearly 2 percent.

U.S. markets are closed for the Independence Day holiday.

“European markets look much happier than they did just a week ago. Bears have been banished to the sidelines,” said Darren Sinden, senior sales trader at Silverwind Securities.

“We may see some profit-taking across the rest of the week, but that would be as expected given the significant gains posted by major European indices in the last sessions.”

Fund tracker EPFR’s data showed investors piled back into emerging market equity funds in the week to June 29 as hopes that Greece would avoid imminent default encouraged risk taking.

Inflows into global emerging market funds tracked by EPFR hit a 12-week high during the week, following three straight weeks of outflows.

U.S. crude oil was steady at $94.95 a barrel.

The euro fell 0.2 percent to $1.4514 after S&P poured cold water on the euro’s rally, which has also drawn support from expectations that the European Central Bank will raise interest rates at its policy meeting later this week.

Bund futures rose 20 ticks.

The dollar (.DXY) was broadly steady against a basket of major currencies.

Improved appetite for risk and the end of the Federal Reserve’s bond-buying program reduced demand for U.S. Treasury bonds, with yields on 10-year notes settling at 3.18 percent, near its highest in almost two months and adding to a weekly rise of more than 30 basis points.

(Additional reporting by Atul Prakash; Editing by Anna Willard)

NEW YORK (Reuters) – Stock investors head into next week with added worries about the sustainability of the recent rally and a desire to reduce risk, as shown by the stampede out of commodities on Thursday.

Stocks also will begin to lose the support they’ve enjoyed from stronger-than-expected earnings since the first-quarter reporting period is almost at an end.

The drop in commodities this week spilled over into commodity-related stocks, which were among the top performers in the last two quarters.

The Standard & Poor’s energy index (.GSPE) ended the week down 7 percent, its biggest weekly drop in a year, and the iShares Silver Trust (SLV.P) suffered its worst week of outflows ever after heavy losses in the precious metal.

While the commodities rout may be done for now, it has left many investors worried about the ramifications.

“It’s hard to pinpoint the time when the bubble bursts and hard to go against the current, but when it bursts it’s precipitous usually,” said Natalie Trunow, senior vice president and chief investment officer of equities at Calvert Asset Management Company in Bethesda, Maryland, which manages about $14.8 billion in assets and is underweight energy.

With first-quarter earnings and also the Federal Reserve’s QE2 purchasing program coming to an end, the stock market could be vulnerable to some weakness in the short term, she said.

“I wouldn’t be surprised if we had a somewhat softer summer or somewhat softer next couple of months,” said Trunow, who said she is still positive on the U.S. market longer-term.

The S&P 500 (.SPX) suffered its worst week since March, even with Friday’s surprisingly strong jobs report that allowed the index to end a four-day losing streak.

It is now just above critical support at 1,330. A close below that level could “turn the intermediate-term picture bearish,” according to a note from Larry McMillan, president of McMillan Analysis Corp.

SENTIMENT STILL UPBEAT

Despite this week’s skittishness, sentiment for the market is positive longer term, and technical indicators do not suggest the market is overbought.

“Our view is still unchanged; we still like the market,” said Jeff Rubin, market strategist at Birinyi Associates in Westport, Connecticut.

Much of the fundamental picture remains bullish for stocks, said Hank Smith, chief investment officer at Haverford Trust Co. in Philadelphia.

“The economy and valuations remain attractive,” he said. “We remain bullish, but with any bull market, it’s healthy to have pullbacks.”

Friday’s Labor Department report, which showed U.S. employment increase more than expected in April and U.S. companies created jobs at the fastest pace in five years, gave evidence of the underlying strength in the economy, analysts said.

But labor has been among the weakest areas, and next week’s jobless benefits claims and retail sales data will be watched for further clues on the jobs picture and health of consumer spending.

In earnings news, a number of retailers are expected to report next week, including Macy’s (M.N), Nordstrom (JWN.N) and Kohl’s (KSS.N).

Earnings estimates have risen since the start of the reporting period. Profits for S&P 500 companies are now expected to have climbed 18 percent in the first quarter from the year before, up from an estimated 13 percent rise at the start of April, according to Thomson Reuters data.

Of the 438 S&P 500 companies that have reported so far, 69 percent have beaten analyst earnings expectations. That’s roughly in line with the high rate of beats seen in recent quarters.

Adding to nervousness, a small group of European finance ministers were meeting to discuss the euro zone debt crisis, and Greece denied a media report speculating the country was considering leaving the euro zone.

The speculation caused stocks to trim some of their gains on Friday.

Friday marked the one-year anniversary of Wall Street’s “flash crash” when prices suddenly plunged and nearly $1 trillion was wiped off U.S. stocks’ value in a matter of minutes before the market bounced back.

The crash shook many investors’ confidence, but the market regained steam and has rallied since about the start of September.

The S&P 500 is up about 28 percent since then.

(Additional reporting by Doris Frankel, Editing by Kenneth Barry)

HONG KONG (Reuters) – Global stock markets were on track for a third week of gains and high-yielding currencies strengthened on Friday, while the threat of Japanese intervention kept the yen close to its low for the month against the dollar.

European stock markets climbed at the opening, with the leading European stocks up +0.78 in early trade.

Japanese stocks posted the largest weekly gain of the year following Tokyo’s aggressive yen selling on Wednesday, which may have totaled as much as 1.9 trillion yen, and repeated pledge to do more if necessary.

Still, that has been catch up with other advanced markets, which have also been rising in September, after underperforming during most of the current quarter.

The Nikkei share average led Asian markets, finishing 1.2 percent higher on the day (.N225) and up 4.2 percent this week, the biggest weekly gain since December 2009, after yen selling intervention brightened the prospects of exporters.

“In addition to the fact that investors aren’t still entirely sure about the outlook for the global economy, they are also closely watching whether there would be any comments from the United States on Japan’s currency intervention,” said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities in Tokyo.

The MSCI index of Asia Pacific shares outside Japan rose 1.2 percent (.MIAPJ0000PUS), with buying spread out across the energy, materials and technology sectors.

The MSCI all-country world stocks index (.MIWD00000PUS) was up 1.9 percent so far this week, on track for the third week of gains. Emerging market stocks, up 2.6 percent in the week (.MSCIEF), have been a big contributor.

CHINA FOCUS

China also set the mid-point of the yuan’s daily trading range at a new high for the sixth consecutive day. This came on the heels of U.S. Treasury Secretary Timothy Geithner’s vow to the U.S. Congress to rally other world powers to push Beijing to move faster on the yuan.

China’s guiding hand to lift its currency has been a signal for other Asian policymakers earlier in the year to allow their own currencies to strengthen.

However, Japan’s intervention this week along with stepped up efforts by officials in Asia and Latin America to fight their own currencies from appreciating appear to have halted the trend, at least for now.

“Policy bias across Asia ex-Japan (AXJ) is still for monetary tightening. In Japan, the focus is still on the extent and means of further monetary easing,” Standard Chartered currency strategists said in a note.

“We view these extremely elevated levels in yen vs AXJ currencies as a strategic buying opportunity in AXJ now that the risk-reward dynamics in USD-JPY appear to have changed.”

In currency markets, the U.S. dollar was nearly unchanged on the day at 85.70 yen, still within spitting distance of its overnight high around 85.93 yen. Japanese exporters may sell dollars near 86 yen, putting a lid on dollar strength.

“The real key positioning is probably what the corporates and Japanese investors need to do and I think there are still corporates out there that need to sell,” said Greg Gibbs, currency strategist at Royal Bank of Scotland in Sydney.

The euro rose 0.4 percent to $1.3132 to a one-month high, lifted by long-term investors encouraged after auctions on Thursday of 10- and 30-year Spanish government bonds produced lower yields than a previous sale in June.

Higher-yielding currencies such as the Australian dollar also rose as stock markets steadily increased during the session and commodity prices gained.

The yield on the 10-year U.S. Treasury note was largely unchanged on the day at 2.77 percent after climbing 4 basis points on Thursday after a drop in initial jobless claims.

Still, the spread of the U.S. 10-year yield over the same maturity Japanese government bond has widened 7 basis points this week, helping Japan’s cause to pull down the yen.

Gold rose 0.5 percent to a record high of $1,277.75 an ounce. The precious metal usually associated with safety had advanced earlier in the week on speculation the Federal Reserve would have to ease policy further, but the persistent gains suggest the rally has taken on a life of its own.

(Additional reporting by Charlotte Cooper and Aiko Hayashi in TOKYO; Editing by Ron Popeski)

HONG KONG (Reuters) –
Asian shares surrendered early gains on Tuesday, weighed down by Chinese stocks, which slid on reports that Beijing will not relax tougher property measures any time soon.

Major European stocks (.FTEU3), however, opened slightly higher after Alcoa (AA.N), the largest U.S. aluminum producer, posted surprisingly strong quarterly results and provided a positive outlook for global consumption of the metal.

The euro steadied after dropping from two-month highs as investors awaited Greece’s return to capital markets for the first time since late April and the results of stress tests on euro zone banks next week.

But the tone was weaker in Asia, where the focus for much of the session was on China‘s volatile stock market.

China’s banking regulator left few doubts that efforts to rein in real estate speculation will remain in place despite media reports of easing restrictions in some cities. That helped to trigger some profit taking in Asian stocks after three days of gains.

“The view that the Chinese will not ease restrictions on property took away from sentiment some, and markets had been up for a few days, so there’s a bit of a correction,” Lorraine Tan, director of research, Asia for Standard & Poor’s in Singapore, said.

“It was a reminder of risks.”

The MSCI ex-Japan share index (.MIAPJ0000PUS) fell 0.7 percent by mid-afternoon after an initial move higher.

The Shanghai composite index (.SSEC) fell 1.6 percent, bringing its year-to-date losses to 25 percent, the poorest performing equity market in Asia.

Hong Kong’s Hang Seng index (.HSI) slipped 0.2 percent, with strength in financial stocks offset by weakness in utilities and energy shares, which sagged as oil prices retreated further from $75 a barrel.

Despite concerns that Beijing will maintain its curbs on property speculation, bargain hunters have their eyes peeled for opportunities in Chinese property-related stocks.

A survey of investors by Macquarie Securities showed that while 78 percent of respondents expected property prices to fall by the end of March 2011, the real estate industry was the top pick of where investors said they would increase exposure in the next six months.

“In addition to being the most cited sector for H2 accumulation, property is even more favored than in our (bullishly toned) November 2009 survey, when a majority of respondents still expected property prices to continue rising,” analysts at the bank said in a report.

Japan’s Nikkei share average (.N225) slipped 0.1 percent, also surrendering early gains. It has had difficulty rising above its 25-day moving average, a technical gauge used by domestic investors.

Though Alcoa’s results beat Wall Street’s expectations, many investors anticipate that earnings forecasts will be revised downward given expectations for slowing economic activity in the United States and China.

The U.S. results season officially started on Monday, with the focus now on quarterly reports from JPMorgan (JPM.N) on Thursday and General Electric (GE.N) on Friday.

“Although there’s a sense of selling fatigue, investor sentiment is still bearish, and the market is looking for a catalyst. Corporate earnings could be one,” said Naoki Koga, a senior fund manager at Toyota Asset Management in Tokyo.

SOUTHEAST ASIA BULLS

Despite the reversal in major Asian bourses, Southeast Asia remains a bright spot among the region’s equity markets.

Indonesia, the Philippines and Thailand were No 2, 3 and 4 in terms of performance so far this year. The benchmark index for the Philippines (.PSI) was at the highest in 2- years, while Thai stocks (.SETI) were just below a 2-year high hit on Monday.

A greater reliance on intra-Asian trade and attractive valuations have been largely behind the outperformance of Southeast Asia.

In currency markets, caution was key.

The euro held steady at $1.2595, with resistance seen roughly around $1.2690, the trendline from the December high.

Debt-laden Greece is seeking to raise 1.25 billion euros through a sale of six-month Treasury bills later in the day. That could prove to be a litmus test for the single currency in the short term.

A robust response to a Spanish debt auction earlier this month saw the euro rally to two-month highs.

The Australian dollar and Korean won, two of the usual targets of risk tolerant investors looking for higher returns, were down on the day and institutional investors maintained a cautious approach.

“The way they are positioned, there is still a feeling that a double-dip recession could happen,” said Jonathan Cavenagh, a currency strategist at Westpac, Sydney.

The Australian dollar slid 0.8 percent to US$0.8697, having stalled in the last three sessions below $0.8800.

The U.S. dollar was up 0.8 percent to 1212.60 won, up 9 percent since May.

The turnaround in Chinese equity markets also weighed on commodities, offsetting Alcoa’s more bullish outlook for global aluminum demand.

U.S. crude oil futures also shed early gains and fell 0.7 percent to $74.39 a barrel, bringing losses to 13 percent since May.

(Additional reporting by Aiko Hayashi and Rika Otsuka in TOKYO)

(Editing by Kim Coghill)