Pimco, the biggest bondholder in troubled US finance group CIT, is planning to trim its exposure to the debt of financial institutions and will continue to avoid the junk bond sector.
It suggests the company believes that two key areas of gains in the first half of the year may be poised for a correction or at least see a halt in the rally.
In a quarterly outlook report published on the fund manager’s website, the world’s biggest bond investor said it was expecting a “W”-shaped economic recovery, with the positive effects of this year’s monetary and fiscal stimulus beginning to fade in 2010, when consumer spending is also expected to decline.
In this environment, Pimco’s analysts said they would continue to favour high-quality securities and that the company would diversify outside the US.
With many parts of the credit markets having rallied strongly this year, Pimco said high-grade corporate valuations “remain attractive”, especially sectors such as utilities, telecoms and energy.
“Our holdings of financials will likely be trimmed after their recent rally. We will likely continue to avoid the high-yield sector,” the report said, adding that these “are vulnerable to an expected rise in defaults and in some cases to risks of government-imposed burden sharing”.
In the case of CIT, bondholders led by Pimco this week agreed to a $3bn rescue to avoid bankruptcy after the US government failed to provide emergency cash. According to regulatory filings, Pimco is the biggest bondholder, owning 2.74 per cent of CIT’s outstanding bonds.
The junk bond or high-yield sector of the credit markets has surged this year as easing fears of economic turmoil have encouraged investors to take risks again. The US high-yield market has notched up 32 per cent in returns so far in 2009, according to Barclays Capital indices, and in Europe the gains have reached nearly 52 per cent.
The rally in high-yield “may be overdone in some segments, but there is still plenty of value left”, said Greg Hopper, senior portfolio manager at Artio Global Investors.
The price of the debt of the riskiest companies, or those rated triple C, has also rallied sharply since the end of last year, even though default expectations are largely unchanged. “It is more dangerous now,” Mr Hopper said. “And there is still at least as much of a chance of bankruptcy.”
Financial debt has also rallied as concerns of capital shortages have eased.
Morgan Stanley analysts said new debt from financial groups was looming, as government programmes that have provided about $300bn of new debt in the past nine months started to be phased out.
“While investors managed to absorb the tremendous ramp-up in non-financial issuance over the first half of 2009, partly thanks to virtually no supply from financials, look for that positive technical to slowly fade as banks show a larger presence in capital markets,” the analysts said.
Additional reporting by Michael Mackenzie in New York
