Pimco, manager of the world's largest bond fund, has cut its exposure to high-yield corporate bonds fearing risks might threaten the rally, especially from Europe, The Wall Street Journal reported.
High-yield corporate debt, or “junk” bonds, have been the best-performing U.S. fixed-income market in 2012 thanks to rock-bottom interest rates that have kept yields on Treasury bonds and other debt low.
Pacific Investment Management Co., also known as Pimco, began cutting its exposure several weeks ago despite widespread talk the European Central Bank would move to buy sovereign debt from countries like Spain to lower borrowing costs there and ease the debt crisis.
Such a move would spark an appetite for riskier assets, though Pimco is cutting exposure anyway on sentiment that the rally for junk bonds is over and Europe faces such uncertainty that there would be a flight to safer corporate debt even if returns are lower.
"Pimco's move sharply contrast with rivals such as BlackRock Inc., which sees more room for junk bonds to strengthen further. It also puts it firmly on the more pessimistic side of a growing debate on the junk bond sector, whose 10 percent return this year through Monday sharply outperformed the 1.2 percent posted by Treasury bonds, as per data from Barclays," The Journal reported.
"Pimco looks more cautiously on the prospects for resolving the eurozone crisis than the junk-bond bulls do."
Demand for junk bonds has been so hot as investors scramble in search for healthy returns that yields on otherwise high-risk corporate debt are falling as investors line up to invest, at least for now.
The average yields on junk bonds dropped to 6.6 percent more recently, a near record low, according to Barclays data.
“It’s amazing: You’re now seeing 4 to 5 percent yields for weaker companies,” said Adam B. Cohen, founder of Covenant Review, a credit research firm, according to The New York Times.
“These are the type of yields that you used to see for blue chips like Exxon and Pepsi.”
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