Pacific Investment Management Co LLC (PIMCO) said investors should move out of government securities and into corporate credit because the US will avoid a recession.
With sovereign bonds in Japan and Germany offering negative yields, and equity valuations stretched, PIMCO said high-quality company debt, junk bonds and bank loans offer a better risk-adjusted alternative.
Investor demand for US debt is to be tested this week with the government scheduled to auction US$24 billion of three-year notes yesterday, US$20 billion of benchmark 10-year securities today and US$12 billion of 30-year bonds on Thursday.
“PIMCO’s belief that the US economy will avoid recession this year bolsters our view that it’s time to move into credit,” PIMCO global credit chief investment officer Mark Kiesel wrote in a note on the company’s Web site. “Credit, in our opinion, is in the ‘sweet spot’ intermediate zone between lower-risk sovereign assets, which tend to outperform leading into recession, and higher-risk assets such as equities.”
Investment-grade corporate bonds, high-yield debt and bank loans provide investors with a chance to boost returns while offering less volatility than stocks, Kiesel wrote.
“Higher interest rates in the US will likely lead to increased demand from foreign investors for US financial assets, which in turn would lead to potential outperformance of credit given global investors’ need for stable income,” Kiesel wrote.
Kiesel is one of three managers for the US$87.8 billion PIMCO Total Return Fund.
The fund has returned 0.1 percent in the past year, underperforming about two-thirds of its peers, according to data compiled by Bloomberg.
The flight to quality that boosted US Treasuries earlier this year revived yesterday after China data showed exports tumbled 25 percent year-on-year in US dollar terms last month. The Shanghai Composite Index fell as much as 3.3 percent.
The benchmark 10-year note yield dropped three basis points to 1.88 percent as of 2:10pm yesterday in Tokyo, according to Bloomberg Bond Trader data.
The price of the 1.625 percent security due in February 2026 climbed 7/32, or US$2.19 per US$1,000 face amount, to 97 21/32.
The “plunge in risk asset prices is helping the bid” for US Treasuries, BNP Paribas SA Tokyo-based interest-rate strategist Tomohisa Fujiki said.
The company is one of the 22 primary dealers that underwrite US debt.
Japan’s 10-year bond yield extended its decline below zero, setting a record of minus-0.09 percent.
After outperforming equities and corporate debt in the first two months of this year, US Treasuries are showing signs of faltering as stronger-than-forecast US employment data and an uptick in inflation expectations lead traders to boost wagers the US Federal Reserve will raise interest rates.
The Bloomberg US Treasury Bond Index has fallen 0.8 percent this month, after gaining 2.1 percent in January and 0.9 percent last month. The Bloomberg US Corporate Bond Index is little changed this month and has gained 1.1 percent this year.
The Fed plans to leave rates unchanged when it meets on Tuesday and Wednesday next week, according to 52 of the 61 economists surveyed by Bloomberg. The European Central Bank plans to cut its deposit rate, which is already below zero, when it meets on Thursday, a separate survey shows.
Derivatives traders see about a 72 percent chance the Fed will raise rates by the end of the year, up from a 36 percent probability on Feb. 25, according to futures data compiled by Bloomberg. The calculation assumes the effective fed funds rate would average 0.625 percent after the Fed’s next increase.
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