Investors should buy U.S. and Australian corporate bonds as “fear and panic” helps drive yield premiums to the highest levels since 2009, according to QIC, an Australian fund manager with about $62 billion of assets under management.
QIC has been adding to its corporate holdings and likes industrial and financial bonds, including those of U.S. and Australian banks, said Susan Buckley, the Brisbane-based asset manager’s head of global fixed interest.
“It’s an opportunity for the brave to be dipping their toes in,” Buckley, whose firm manages about A$25 billion ($25.9 billion) of cash and fixed-income assets, said in a telephone interview. “That’s what you should be doing when there’s fear and panic in markets. To be doing the opposite you have to be thinking the world is going into global recession.”
Citigroup Inc. and UBS AG are among banks to cut forecasts for global growth as the sovereign crisis that began in Greece spreads to larger European economies and threatens the region’s common currency, while U.S. job growth stagnates. The extra yield investors demand to hold Australian corporate bonds surged 48 basis points this quarter to 225 basis points yesterday and reached the highest since December 2009 on Sept. 12, while spreads on U.S. company debt widened to 233, the highest since October 2009, according to Bank of America Merrill Lynch indexes.
U.S. firms reported average earnings-per-share growth of 19 percent in the current reporting season, according to data compiled by Bloomberg on more than 5,000 stocks. Investors have poured more than $32 billion into U.S. bonds this year as of Sept. 7, according to EPFR Global, a Cambridge, Massachusetts-based research company.
“U.S. corporates are in healthy shape” with strong cash balances and profits, while the market for their debt securities remains liquid, Buckley said.
U.S. corporate bonds have returned 6.1 percent this year, compared with a 8.6 percent gain on Australian notes, Merrill Lynch indexes show. Australian government bonds returned 11 percent while Treasuries gained 8.1 percent.
Australia’s entire stock of outstanding bonds, with maturities out to 2023, is trading below the nation’s 4.75 percent benchmark interest rate. Cash-rate futures indicate an 89 percent chance that Reserve Bank of Australia Governor Glenn Stevens will cut the benchmark by 100 basis points by year-end.
Stevens signaled a willingness Sept. 7 to keep interest rates on hold while the nation’s consumers retrench and global financial markets create instability for the “foreseeable future.”
While the 10-year bond yield, currently at 4.14 percent, may fall further if market sentiment doesn’t improve, investors should avoid adding government debt at current levels as they don’t reflect Australia’s growth prospects, Buckley said.
“The case is not there for easing interest rates here while there’s still inflation pressures in the local economy,” she said. “It’s not the time to be going long interest rate markets, either here or globally.”
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