REUTERS SUMMIT-Vanguard bond head warns of risk in yield hunt

(For other news from the Reuters Global Wealth Management Summit (LSE: SUMM.L - news) , click on http://www.reuters.com/summit/Wealth14)

By Ross Kerber and Luciana Lopez

NEW YORK (Frankfurt: HX6.F - news) , June 18 (Reuters) - Vanguard Group Inc's new bond chief on Wednesday said investors could be ignoring warning signs in less stable countries in their search for yield.

Recent bond sales have underscored how eager investors are for higher returns - even in countries that could face significant risks, Gregory Davis, global head of fixed income for Vanguard, said at the Reuters Global Wealth Management Summit in New York.

"It has to start raising a red flag in your mind that things are starting to feel a little bit overheated," Davis said, citing recent debt sales in countries such as Spain and Ecuador.

Spain, for example, sold bonds at record low yields recently, despite its role as a major driver of the European sovereign debt crisis and an unemployment rate above 25 percent.

Just this week, Ecuador's 10-year bond issue was oversubscribed at a final yield of 7.95 percent, despite the country's 2008 default on an unwillingness to pay.

"At some point there will be a repricing," Davis said. When investing in such countries, he said, "You are taking on additional risk, and the question is are you being compensated enough."

Overall, Davis offered a relatively upbeat economic outlook and said he shares a view among many economists that the U.S. economy, the world's largest, will grow by around 3 percent going into 2015.

The 43-year-old Davis, who took over as head of Vanguard's fixed-income operations earlier this year, oversees about $800 billion of assets; Vanguard's assets in total are more than $2.5 trillion.

Because central banks in many developed countries have kept interest rates around zero to boost their flagging economies, many investors have turned to riskier instruments to extract higher returns.

With the yield on the U.S. 10-year Treasury note hovering around 2.6 percent, investors have poured money into other debt instruments. High-yield corporate bond funds, for example, have seen net inflows every week but five so far this year, according to data from Lipper, a Thomson Reuters (Frankfurt: TOC.F - news) unit.

On the other hand, some investors have favored the United States among developed countries because of what Davis called a "pretty compelling" outlook. "The only challenge is the U.S. is probably further along in the economic recovery relative to Europe," he said.

"As a result, our rates are probably going to rise sooner than you'll see in continental Europe, so that will cause a bit of a concern for some investors," Davis said.

The European Central Bank, for example, continues to ease, with policymakers there imposing negative rates on overnight depositors this month.

In contrast, the U.S. Federal Reserve is slowly pulling back on its crisis-era accommodative stance, decreasing its monthly bond purchases. The Fed later on Wednesday is expected to maintain that stance. (Editing by Leslie Adler)