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Tags: pimco | junk | bonds | debt

Pimco Says It's Time to Buy Junk Bonds

Pimco Says It's Time to Buy Junk Bonds

Thursday, 03 March 2016 07:42 AM EST

Pacific Investment Management Co. says it’s time to buy U.S. junk bonds. And the money manager is not alone.

Investors have sunk record levels of cash into the largest high-yield-debt exchange-traded fund in recent days. Prices for the bonds have been rising since mid-February.

What’s unclear is whether investors’ recent enthusiasm marks a turning point for a market where prices have been plunging since June, or if it is another false dawn for junk bonds, which also saw surges in August and October. The answer to that question depends in large part on whether the economy is heading into a recession.

Consumer spending is still strong, and corporate profits are still solid, said Mark Kiesel, chief investment officer for global credit at Pimco in Newport Beach, California. Those factors should fuel strong returns for junk bonds, he said, adding that he thinks the economy is doing well.

"The market is as attractive as it’s been in four or five years," Kiesel said. "There are a lot of opportunities there." Pimco has started buying debt in the energy sector for the first time in several years, he added, after the price of oil rose in recent weeks.

Even portfolio managers that are positive on junk bonds have been cautious. Speculative-grade notes with relatively high credit ratings have performed better than those with low ratings, on a yield basis. Investors’ preference for safer assets in the junk market underscores why recent gains may vanish.

"It’s still a pretty risky market out there," said Margie Patel, senior portfolio manager at Wells Capital Management, which manages about $350 billion of assets. Despite that risk Patel is buying, mainly higher-rated junk bonds, which she thinks will generate single-digit returns over the next year. 

Valuations on the bonds are attractive by some measures. The average yield for example is 9 percent, after rising above 10 percent last month, Bank of America Merrill Lynch index data show. The average over the last 10 years has been 8.7 percent. 

At current market yields, if fewer than 9 percent of junk bond issuers default, investors will come out ahead, said Gregory Nassour, principal and co-head of investment-grade portfolio management at Vanguard Group. Nassour said he is focusing on safer junk bonds.


Many investors think that the default rate the market is bracing for is far higher than what will actually come to pass, and that the U.S. economy is sending positive signals. A U.S. Commerce Department report last week said that consumer spending climbed in January by the most in eight months. A report from the U.S. Institute for Supply Management said on Tuesday that new factory orders were expanding, which may mean the beleaguered manufacturing sector is stabilizing.

Those positive signs are not convincing to some investors. Bonnie Baha, a money manager at DoubleLine Capital, said that markets could be thrown into a tailspin by further weakening in China’s economy, the potential for the U.K. to exit Europe, and other macroeconomic and political factors. Companies still have low cash flow relative to the interest payments they have to make, she said.

"What is the catalyst for things to get better? At some point, the market will look and see things haven’t changed that much, and really could get worse," Baha said. 


Even if junk bonds look cheap now, prices could fall further, said Michael Contopoulos, head of high yield strategy at Bank of America in New York. The recent drop in yields should not be taken as a sign that the market has recovered, he added.

"If I had a new dollar to put to work, I would wait until things got cheaper still," he said.

For now, the balance of investors seem to disagree. Gershon Distenfeld, director of high-yield at AllianceBernstein, said that junk bonds could offer returns that rival stocks in the coming years, but with less risk if the world becomes more dangerous. AllianceBernstein, which manages $456 billion of assets, has been looking at high-yield credits recently in sectors including energy. 

"Valuations just kept on getting cheaper and cheaper, and we think that the odds are the market is going to do better," Distenfeld said.

© Copyright 2024 Bloomberg News. All rights reserved.

Pacific Investment Management Co. says it's time to buy U.S. junk bonds. And the money manager is not alone.Investors have sunk record levels of cash into the largest high-yield-debt exchange-traded fund in recent days.
pimco, junk, bonds, debt
Thursday, 03 March 2016 07:42 AM
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