Tags: federated | balestrino | bonds | junk

Federated's Balestrino Cuts Back on Bonds, Avoids Junk

Tuesday, 21 Aug 2012 03:47 PM

Federated Investors Inc. has reduced its exposure to credit markets as yields on the riskiest corporate debt hover near record lows, according to Joseph Balestrino, the firm’s chief fixed-income market strategist.

“We have cut back on credit,” Balestrino, a money manager who helps oversee $49 billion of bonds at the Pittsburgh-based mutual-fund company, said in a Bloomberg TV interview.

With the extra yield investors demand to hold speculative- grade debt instead of similar-maturity Treasuries at about 600 basis points and investment-grade debt at a spread of 180, “history says those are decent levels,” he said. “The only issue with high yield is we’re now testing all-time absolute yield lows. You get below 7 percent and history said it is not a great buying time.”

Average yields on speculative-grade debt dropped to 7.37 percent yesterday, compared with a record low 7.19 percent in May 2011, according to the Bank of America Merrill Lynch U.S. High-Yield Master II bond index.

As the European debt crisis roils markets for a third year, investors have fled to the relative safety of U.S. government debt and investment-grade bonds. With the Federal Reserve saying it expects to keep interest rates near zero through late 2014 to bolster the economic recovery, demand for high-yield, high-risk bonds has grown.

“We’ve cut back the most in the high-yield market, Balestrino said. “It’s most sensitive to world economies.”

‘Business Unfriendly’

For now, with near-term stresses like the so-called fiscal cliff in the U.S. and a presidential election this fall, “it all seems to still be business unfriendly, and in an environment where risk has been on in a less-than-stellar environment, I think you take cover for a while,” Balestrino said. “I don’t mind buying Treasuries at 1.8 on the 10-year.”

If the European crisis were to abate and economic conditions improve, coaxing investors out of Treasuries, “we’re OK,” he said.

Yields on 10-year Treasury notes rose 15 basis points, or 0.15 percentage point, last week to 1.81 percent. The price of the 1.625 percent security maturing in August 2022 declined 1 12/32, or $13.75 per $1,000 face value, or 98 9/32. The yield was little changed at 1.81 percent Tuesday.

The benchmark notes will yield 1.6 percent by the end of September, below June’s projection of 1.9 percent, median estimates in separate Bloomberg surveys show. The year-end forecast fell to 1.65 percent from 2.1 percent.

“No math can get us to fair value on the Treasury market today relative to anything inflation-adjusted,” he said. “Like it or not, we are the ultimate safe haven. We think there’s some trouble ahead. You are supposed to own the safe haven.”

The company’s Total Return Bond Fund boosted its position in Treasuries to 10.9 percent of its $7.5 billion holdings in June from 7.9 percent in February.

“It’s going to be a long, slow slog,” Balestrino said. “I don’t think yields are going up very much.”

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