Financial life in a big town

Ask the people who invest billions for a living to name their favorite picks for 2012 and you’ll get a smorgasbord worthy of a holiday party: Brazilian stocks, U.S. junk bonds, and government debt from Colombia. Ask them what they dislike and they’ll name one of the top-performing investments this year: U.S. government bonds.

Investors can rattle off a long list of reasons to avoid Treasurys. They pay next to nothing and are bound to plunge in value whenever interest rates begin climbing from their historically low levels. It seems nobody likes Treasurys, yet everybody keeps buying them anyway.

“Our least favorite asset is Treasurys,” said Christine Hurtsellers, chief investment officer for fixed-income at ING Investment Management during a recent press briefing. “We still have a lot, but it’s hard to make the argument for them.”

It’s a tricky problem for bond-fund managers at a time when everyday Americans are trusting them with more of their savings. Among investors, there’s a solid belief that Treasury prices must fall and push interest rates up at some point. But those who have bet on a Treasury market collapse this year got burned.

Bill Gross, the bond-world version of investment sage Warren Buffett, dropped nearly all Treasury holdings from the fund he manages at Pimco in early 2011. He argued that if Republicans held up lifting the government’s borrowing limit, the country would risk default. Borrowing rates would spike as the world’s investors dropped U.S. government debt, just as they have in Europe.

Most of what Gross predicted came true. The debt-limit fight raised worries about default and led to Standard & Poor’s taking away the country’s AAA credit rating in early August. But instead of spiking, U.S. borrowing rates plunged as traders sold everything else to buy U.S. government debt. The race into Treasurys helped drive the entire bond market up 3.8 percent from July to September. Gross got the big picture right but his big bet against Treasurys didn’t pan out. Pimco’s Total Return Fund lost 1.2 percent, its worst quarterly performance in three years.

It’s been a recurring story since the financial crisis hit in 2008. For three years running, pundits have predicted that investors will eventually refuse to finance the U.S. government’s $15 trillion in debt and the Treasury market will collapse. But worries over the U.S. economy and the perilous state of Europe’s financial system keep drawing banks and money managers from around the world back to the U.S. dollar and Treasurys.

That demand continues to push U.S. government bond prices up, the main reason why the Treasury market has returned 8.5 percent this year, despite microscopic yields, according to Bank of America-Merrill Lynch data. The benchmark for stock market funds, the S&P 500 index, has returned less than 1 percent, including dividend payments, and that’s with a 7.4 percent surge over the past week.

“It’s been a pretty strong year for bonds,” said Michael Gitlin, director of fixed income at T. Rowe Price, “and it’s largely a result of Treasurys.”

Judging by the gauges money managers usually check before making a move, buying Treasurys still looks like a bad idea. Consider this sample:

(asterisk) The benchmark 10-year Treasury pays just 2 percent a year. Take inflation into account and the payout on Treasurys equals negative 1.5 percent, what finance types call the real rate.

(asterisk) Treasury yields pay less than top-grade corporate bonds at 3.7 percent and even less than the stock market’s 2 percent dividend yield.

“My colleagues say there’s little value in 10-year (Treasurys) and I’d agree,” Gitlin said. “People have been saying there’s a fixed-income bubble. No, there’s a Treasury bubble.”

If there’s so little to like about U.S. government bonds, why are the world’s investors still buying Treasurys instead of dumping them? In a word, it’s Europe.

As the crisis seemed to spread from country to country this year, the world’s traders plowed more money into Treasurys. The higher the demand for U.S. debt, the lower the interest rate, or yield. So when it looked like Greece might default on its debts earlier this year, the yield on the 10-year Treasury note sank below 3 percent. And when attention turned to Italy and its government debts the yield sank even further, dipping below 2 percent in September. The shift of money out of Europe and into the U.S. has pushed Europe’s borrowing rates to dangerous levels while causing U.S. interest rates to sink.

“You can hate the budget situation and hate the low yield, but if there’s a panic it’s the asset that outperforms,” said Robert Robis, head of fixed-income strategy at ING Investment Management.

A good reason to hold Treasurys, in other words, is that the Treasury market remains the world’s favorite hiding spot. So, for many fund managers Treasurys aren’t exactly an investment. Buying Treasurys is like taking out an insurance contract, Robis said. They’re protection against global financial trouble.

The ING Global Bond fund, for instance, has 15 percent of its $641 million in Treasurys, less than the 20 percent in the benchmark Barclay’s bond index. Robis said having none would be like betting European governments will come to a quick solution to the region’s debt crisis and that the U.S. economy will soon recover its health.

“There’s still a need to hold Treasurys,” Robis said. “Just don’t expect to make a fortune off them.”

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The number of people applying for unemployment benefits fell last week to the lowest level since early April, a sign that layoffs are easing and hiring may pick up.

The Labor Department says weekly applications dropped by 5,000 to a seasonally adjusted 388,000. It was the fourth decline in five weeks.

The four-week average, a less volatile measure, dropped to 396,750. That’s the first time the average been below 400,000 in seven months.

Applications need to consistently drop below 375,000 to signal sustained job gains payday loan lenders. They haven’t been that low since February.

The total number of people receiving benefits also fell to the lowest level since Sept. 2008, when Lehman Brothers collapsed and the financial crisis intensified.

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BERLIN

ROME

Markets around the world gave the thumbs-up to a new bailout package to solve the European debt crisis Thursday, but there are still plenty of questions about just what it all means, where the money

Folk music legend Pete Seeger and `60s folk singer Arlo Guthrie joined Occupy Wall Street demonstrators Friday in their campaign against corporate greed while residents near the protest park encampment pushed to regain some peace and quiet in their neighborhood.

Seeger joined in the Occupy Wall Street protest Friday night, replacing his banjo with two canes as he marched with throngs of people in New York City’s tony Upper West Side past banks and shiny department stores.

The 92-year-old Seeger, accompanied by musician-grandson Tao Rodriguez Seeger, composer David Amram, and bluesman Guy Davis, shouted out the verses of protest anthems as the crowd of about 1,000 people sang and chanted.

They marched peacefully over more than 30 blocks from Symphony Space, where the Seegers and other musicians performed, to Columbus Circle. Police watched from the sidelines.

Occupy Wall Street began a month ago in lower Manhattan among a few young people, and has grown to tens of thousands around the country and the world. A recent Associated Press-GfK poll says more than one-third of the country supports the Wall Street protesters, and even more _ 58 percent _ say they are furious about America’s politics.

But the encampment at Zuccotti Park has become more than a tolerable nuisance, some neighborhood residents say. At a meeting Thursday, they complained of protesters urinating in the streets and beating drums in the middle of the night. Some called for the protesters to vacate the park.

The area’s community board voted unanimously for a resolution that recognized the protesters’ First Amendment rights while calling for a crackdown on noise and public urination and defecation.

U.S. Rep. Jerrold Nadler, Manhattan Borough President Scott Stringer and state Sen. Daniel Squadron said in a statement that the resolution was “an attempt to establish a sensible framework that respects the protesters’ fundamental rights while addressing the very real quality of life concerns for residents and businesses around Zuccotti Park.”

Asked about Occupy Wall Street on WOR Radio on Friday, Mayor Michael Bloomberg said the protesters’ leaderless structure has made it difficult to negotiate with them.

Occupy Wall Street spokesman Han Shan, who has served as a liaison between protesters and local elected officials, agreed the protesters needed to be better neighbors. Shan, who attended the meeting, promised to limit the noise.

At Columbus Circle, Seeger and friends walked to the chant of “We are the 99 percent” and “We are unstoppable; another world is possible.” Seeger stopped to bang a metal statue of an elephant with his cane _ to cheers from the crowd.

At the center of the plaza, Seeger and Amram were joined by Guthrie in a round of “We Shall Overcome,” a protest anthem made popular by Seeger.

After more singing, Seeger asked for a mic check to tell the crowd: “The words are simple: I could be happy spending my days on the river that flows both way-ay-ays.”

During the march, the younger Seeger, in troubadour fashion like his grandfather, walked among the protesters playing songs. Amra took up a flute and others enlivened the night protest with the sounds of the accordion, banjos, and guitars.

At the front of the throng, marchers held American flags and a large blue flag that said: “Revolution Generation … Debt is Slavery.” Along the way, the crowd sang protest songs made popular or written by Seeger, Woody Guthrie, and others of the protest era.

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Associated Press writer Karen Matthews contributed to this report.

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The New York City subway is to resume some services Monday.

The city’s public transit system, the country’s largest, has been down because of the threat of the approaching Hurricane Irene. Subways, trains and buses are slowly coming back on after inspectors look for any damage.

Officials said commuters should expect long lines and long waits.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP’s earlier story is below.

Many travelers heading to and from the East Coast still face days of delays even as airlines start flying again Monday at major airports that closed for Tropical Storm Irene.

More than 11,000 flights were canceled nationwide over the weekend, and hundreds more will be scrubbed Monday morning, a flight-tracking service said.

There’s no easy way to squeeze all those displaced passengers onto scheduled flights, especially if airports around New York _ the nation’s busiest airspace _ encounter delays reopening Monday. And ground transport alternatives remain limited, with bus and train service disrupted into Monday as well along the East Coast.

Airlines won’t say how many passengers have been grounded since Irene came ashore in North Carolina on Saturday.

FlightAware, which tracks cancelations, put the total around 650,000, noting that many of the 11,800-plus flights canceled so far were on regional airlines that use small planes. Some travel experts suggested much larger numbers _ 1 million or more.

Finding open seats will be especially difficult this week because it’s the last gasp of the summer vacation season.

“We’re coming into the Labor Day holiday weekend, so a lot of those flights are already full,” said Todd Lehmacher, a spokesman for US Airways.

Airlines resumed flights Sunday at airports around Washington, Philadelphia and Richmond, Va. But the longer closure of the New York area’s Kennedy, LaGuardia and Newark, N.J., airports means travel delays will continue rippling across the country.

The Port Authority of New York and New Jersey, which operates the three airports, said late Sunday that Kennedy and Newark would open to arriving flights at 6 a.m. Monday, with departures beginning at noon. LaGuardia was to reopen at 7 a.m.

New York City officials said they weren’t sure Sunday evening when mass transit would be fully restored after shutting down Saturday, though some local bus service has resumed. The subways remained closed, and downed trees and high water still covered commuter train tracks across the region. Airline officials said those disruptions would affect their ability to get back into gear.

“It’s really dependent upon mass transit and the airport being ready to support the start-up,” JetBlue CEO Dave Barger told NBC.

Long-distance bus and train companies also saw lingering effects from Irene, which was downgraded early Sunday from a hurricane to a tropical storm as high winds ebbed.

Greyhound scrubbed bus travel between Richmond, Va., and Boston all weekend. A spokeswoman said buses would begin to roll north out of Richmond Monday morning and the company hoped to be running in New York by midday.

Amtrak said trains from New York to Florida will be canceled Monday, as will the car train between Lorton, Va., and Sanford, Fla. Some lines in North Carolina and Florida will be open.

Amtrak said in a statement Sunday evening that many routes south of Philadelphia will resume operation, while it canceled many trains between New York and points north. The railroad said separately that its inspections are revealing problems with wiring and signals, as well as trees blocking the tracks. Passengers with paid tickets on canceled trains can rebook or receive refunds by calling 800-872-7245 or visiting Amtrak.com.

But United, Continental, Delta, American, JetBlue, Southwest, AirTran and US Airways canceled hundreds of Monday-morning flights to the New York and Boston area.

Airlines said passengers should call ahead and make sure they have a confirmed seat before going to the airport, but the 670 flights that FlightAware said airlines had canceled for Monday is a small share of the nation’s daily flights.

Airlines also moved several hundred planes out of the storm’s path to avoid damage, which will further slow the return to normal service.

When blizzards hit the East Coast in December and February, it took some passengers days to get home. That could happen again.

Sara Hesselsweet of Norwalk, Conn., and her family were to fly home Sunday from vacation at Lake Tahoe on the California-Nevada border. After their flight was canceled, American Airlines told her it couldn’t find seats for her, her husband and 2-year-old son until next Saturday.

So the family decided to fly from Reno, Nev., to Dallas and on to Chicago, where they would rent a car to drive back to Connecticut.

“We checked Philadelphia, D.C., Boston, the Carolinas _ we couldn’t get a flight anywhere,” said Hesselsweet, sitting amid a pile of carry-on bags in the Reno airport.

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In the stunning case of controversial timber company Sino-Forest, Friday was perhaps the most stunning day of all.

The Ontario Securities Commission cracked down on the company, halting trading in its shares and demanding the resignation of several top executives. Just hours later the OSC rescinded the resignation order because it apparently overstepped the regulator

Royal Bank declined to comment Friday on a report that two U.S. banks were showing interest in acquiring the Canadian bank

German Chancellor Angela Merkel said Saturday that it’s important to avoid doing anything that could endanger the global economic upswing as Europe battles the debt crisis in Greece and beyond.

Merkel’s government is willing to grant Athens further aid but wants Greece’s private creditors to share the burden _ something the European Central Bank opposes. Still, the head of a group that represents German private-sector banks signaled readiness to discuss the proposal.

A strong recovery in Germany, Europe’s biggest economy, has yet to be dented by debt woes elsewhere in the 17-nation eurozone.

Asked in her weekly video podcast whether the crisis could endanger Germany’s upswing, Merkel replied “if we don’t act right, that could happen, but that’s exactly what we want to avoid.”

“That’s why we say that we cannot simply allow an uncontrolled bankruptcy by a country,” Merkel said, adding that Europe needs to see how it can help struggling countries improve their competitiveness and also allow them to reduce their debts. She didn’t mention Greece by name.

“We must do nothing that endangers the global upswing as a whole and would then put Germany in danger again,” she added.

Merkel recalled that the German economy contracted by nearly 5 percent in 2009 following the global financial crisis _ “there hadn’t been anything like it in decades, and anything like that absolutely has to be prevented from recurring.”

Merkel’s finance minister, Wolfgang Schaeuble, is pushing for Greece to get more rescue loans only if investors agree to get repaid seven years late on their Greek bonds. That would give the country more time to get a handle on its euro340 billion ($491 billion) in debt.

That demand is meant to rally support among the public and, particularly, lawmakers in Merkel’s center-right coalition _ some of them restless at the idea of giving Greece more money.

However, the ECB says Greece must not change the terms of its debt in ways that put it in official default.

Ratings agencies have said that a bond repayment that materially disadvantages bondholders would be considered a default. Germany has remained vague about key details, such as interest rates and any collateral provisions.

The general manager of the Association of German Banks gave Schaeuble’s proposal a cautious welcome, signaling that banks might be prepared to go along with it _ though he also stressed it is important “to see that we don’t endanger financial market stability.”

“The concept must be made more concrete,” Michael Kemmer said on Deutschlandfunk radio. At the moment, “several important details, are missing, so that we can’t say at the moment that this is suitable and we can participate.”

“In principle, it is something we can talk about,” he said _ though he stressed that any solution must be voluntary. Greece owes German banks some euro10 billion.

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