Tags: pimco | blackstone

'Waiting for Something Bad to Happen': Pimco to Blackstone Prepare to Feast on Junk Bonds

Friday, 17 October 2014 07:00 AM

In a junk-bond market that has been anything but high-yield for almost two years, the world’s biggest debt-fund managers have been stockpiling cash for a selloff. After the worst one in three years, they’re getting ready to pounce.

Firms from Pacific Investment Management Co. to Blackstone Group LP say they are poised to scoop up speculative-grade corporate bonds after yields rose to the highest levels in more than a year. They’re looking for bargains after building up the highest levels of cash in almost three years.

“Credit is a buy here, specifically high yield” bonds and loans, Mark Kiesel, one of three managers who oversee Pimco’s $202 billion Total Return Fund, said yesterday in a Bloomberg Television interview.

At Blackstone, Chief Executive Officer Stephen Schwarzman told investors yesterday that the firm’s $70.2 billion credit unit is ready to “feast” on lower-rated, long-term debt, particularly in Europe, after “waiting patiently for something bad to happen.”

Taxable corporate-bond mutual funds tracked by the Investment Company Institute increased the proportion of cash and cash-like instruments they set aside to 8.5 percent of their $1.96 trillion of assets in August. That’s up from a three-year low of 4.9 percent in April 2013 and the most since November 2011, ICI data show.

Staying Flexible

By amassing cash or parking money in easy-to-sell debt such as Treasurys, fund managers have been maintaining flexibility to swoop in and buy securities at discounts.

Average yields on speculative-grade bonds sold by companies from the U.S. to Japan climbed to 6.67 percent yesterday, jumping more than 1 percentage point from a record-low 5.64 percent in June, according to Bank of America Merrill Lynch index data. The debt is now paying 5.3 percentage points more than government bonds, the widest spread since July 2013 and up from 3.6 percentage points in June. The market hasn’t moved that much since the European debt crisis in 2011, the index data show.

In the market for leveraged loans, prices dropped to the lowest levels since 2012, with the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index falling 1 cent this week to 95.7 cents on the dollar.

TCW ‘Nibbling’

TCW Group Inc. has been preparing for buying in a selloff by keeping more Treasurys and other liquid government-backed assets such as Fannie Mae-guaranteed commercial mortgage securities and U.S.-insured student-loan bonds, Laird Landmann, a co-director of fixed-income at the Los Angeles-based firm, said last week.

The firm, which oversees about $145 billion of assets, was “nibbling” on riskier debt this week by buying securities, Bryan Whalen, a group managing director for U.S. fixed income, said in an Oct. 15 interview. “We recognize this has a ways to go, so we’re being disciplined.”

At the same time, hedge fund firms Oaktree Capital Group LLC, Ares Management LP and Fortress Investment Group LLC are starting up distressed debt funds so they can scoop up oversold assets.

“We’ve done nothing but buying,” said Jeff Peskind, who oversees a $1.3 billion distressed-debt fund as chief investment officer of Phoenix Investment Adviser LLC. “Bonds have got down to a price where they were getting pretty attractive.”

Slim Returns

After pocketing average annual returns of 19 percent since the 2008 financial crisis, junk-bond investors worldwide this year are facing the slimmest gains of the past six years. The Bank of America Merrill Lynch Global High Yield Index has fallen 2.76 percent since June 30, after rising 5.86 percent in the first half. Returns this year of 2.9 percent through Oct. 15 compare with 7.1 percent in all of 2013.

The declines this month are being led by debt of energy companies that have been dogged by a plunge in oil prices amid growing signs of a weakening economy and glut in supply.

The selloff has been exacerbated by poor liquidity as Wall Street banks that act as market makers cut their debt holdings, making it more difficult for fund managers to trade. The 22 dealers that do business with the Federal Reserve reduced their net holdings of high-yield bonds by $1.7 billion in the two weeks ended Oct. 8 to a net $6.3 billion, Fed data show.

Derivatives Bets

“Even when prices go down, it’s hard to buy paper,” Gershon Distenfeld, director of high yield at AllianceBernstein Holding LP, which oversees $473 billion of assets, said in a telephone interview. “Everyone thinks they’re gonna do X, Y and Z,” but can’t because the liquidity isn’t there.

One way fund managers are getting around that is by selling insurance-like derivatives known as credit-default swaps, which pay them for taking on the risk that companies won’t repay their debt. Trading in the Markit CDX North American High Yield Index, a benchmark instrument for such wagers, surged to 269 percent more than the daily average on Oct. 15 and 177 percent more Thursday, data compiled by Bloomberg show.

At Henderson Global Investors Ltd. in London, where John Pattullo manages the equivalent of about $120 billion as head of retail fixed-income, the firm was taking some of its risk through credit derivatives.

“Valuations in corporate bonds are getting interesting,” he said, noting the company has 15 percent of its holdings in cash. “That’s an opportunity for sensible asset allocation and to pick up good names.”

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In a junk-bond market that has been anything but high-yield for almost two years, the world's biggest debt-fund managers have been stockpiling cash for a selloff. After the worst one in three years, they're getting ready to pounce.
pimco, blackstone
Friday, 17 October 2014 07:00 AM
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