Barclays in the Americas

Barclays Wealth Compass September

• Buy 30-year US Treasury, Sell 10-year U.S. Treasury
• Continue to use a 'Barbell' Portfolio: stay overweight in equities and high-yield credit as well as long-dated government bonds
• Consider a small overweight in real estate, only asset class without significant rebound

Aaron S. Gurwitz, Chief Investment Officer at Barclays Wealth, explains "We know two things today that we did not know at the start of the summer. The first is that the U.S. economic recovery has lost momentum at a time when unemployment is still extremely high."

"The second thing is that corporate profits continue to grow faster than consensus expectations," Mr. Gurwitz added. "Surprisingly good earnings reports combined with downbeat economic statistics have allowed both stocks and long-term government bonds to rally. We question whether that can continue."

In light of this environment, Barclays Wealth has the following recommendations:

Take Advantage of Expected US 30- to 10-year U.S. Treasury Spread Compression
We view high-quality long-dated government bonds as a way of insuring portfolios against deflation risk. However, in the U.S. the summer's rally in bond prices has pulled the 10-year Treasury yield down disproportionately.

Brian Grossman, Fixed Income Strategist commented "Yields on 10-year U.S. Treasury have plummeted, leaving 30-year Treasury bonds looking cheap by comparison. Over time, we expect the gulf between 30-year yields and 10-year yields to narrow.  We think that this is an opportunity so long as the spread is greater than 1.5 standard deviations above its average over 20 years, or 80 basis points to buy the 30-year and sell the 10-year U.S. Treasury – thus being net long spread compression.  We believe this idea can also act as a low-risk hedge against deflation nerves extending further into the future."

Use a 'Barbell' Portfolio: Stay overweight in equities and high-yield credit as well as long-dated government bonds
Investor expectations remain volatile and polarized, with fears of both deflation and inflation co-existing. In this climate, the most appropriate tactic to adopt in balanced portfolios continues to be, in our view, the 'barbell' approach presented at mid-year in the July/August 2010 Compass. Thus we recommend staying overweight both selected risk assets (equities and high-yield credit) and long-dated government bonds, and underweight cash and investment-grade credit.

Kevin Gardiner, Head of Global Investment Strategy, said:  "For this tactic to work, both stocks and bonds must face relatively limited downside. If this weren't the case, what we gained at one end might be given back at the other. Arguably, equity valuations seemed to provide something of a floor for stocks in June as they approached 2009's lows.  We believe the reduced likelihood of a hike in official interest rates on both sides of the Atlantic offers a degree of support to bond prices: a major sell-off seems unlikely with the curve so steep."

Consider a small overweight in real estate, only asset class without significant rebounding
As part of the opportunistic side of Barclays Wealth's 'barbell' portfolio strategy we recommend a small overweight to real estate. Virtually all the asset classes that had fallen precipitously in 2008 at least partially rebounded in 2009, with one major exception: US real estate.

Brian Nick, Investment Strategist commented "We will not expect a robust pick up in property prices until we are satisfied that US unemployment is falling. Should an employment recovery be underway by this time next year, we would expect the lack of new construction and diminishing excess supply in certain sectors to translate into higher prices."

For further information contact:

US

Jignasa Patel, Media Relations
(+1) 212 526 3568

Tiffany Alcorn
(+1) 212 526 7992