Pacific Investment Management Co. says it’s time to buy U.S. junk bonds. And the money manager is not alone.
March 3, 2016 Bloomberg
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– buyers now seem reluctant to take risk, and may flee again at the first sign of economic storms.
“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 just under 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.