Tags: credit | slump | pimco | prices

Credit Slump Leaves Pimco Cold as Knockdown Prices Lure Some

Credit Slump Leaves Pimco Cold as Knockdown Prices Lure Some
(Pimco)

Tuesday, 21 November 2017 10:13 AM

A reality check in corporate bond markets has left Andrew Balls unimpressed. Pimco’s chief investment officer for global fixed income is resisting buying on the dip in anticipation of a steeper correction.

Federated Investors Inc.’s Gene Neavin, meanwhile, is looking for bargains in the high-yield market.

After a selloff that saw investors pull $3.5 billion from high-yield funds this month, according to UBS Group AG, the debate about inflated market values finds some of the biggest fund managers on opposing sides. Borrowing costs for companies remain near post-crisis lows as the Federal Reserve gears up to further tighten monetary policy.

In Pittsburgh, money manager Neavin is scouring the wreckage for health-care companies that sold off most steeply. 

“The backup in spreads is mostly credit-specific so we look at it as an opportunity to buy companies that we like,” Neavin said by phone. “We think there are several pharma names that are oversold.”

From his vantage point in London, however, Pacific Investment Management Co.’s Balls sees little to get excited about. “You’re still at levels where it’s hard to see value,” he said in an interview.

The reversal added about 40 basis points to high-yield spreads and put them within reaching distance of UBS’s fair-value level of 450, strategists including London-based Yianos Kontopoulos wrote in a Nov. 17 note to clients. The yield margin in an index of U.S. investment-grade bonds compared to government debt widened about 8 basis points, according to Bloomberg indexes.

It’s not only the Atlantic Ocean and outlook separating the two fund managers; there’s also a gulf in the types of bonds they buy. The $8.6 billion Pimco Foreign Bond Fund which Balls helps run targets high-grade securities. Neavin’s $1 billion Federated High Yield Trust focuses on sub-investment grade notes including those in the CCC category.

For active fund managers like Pimco and Federated, a selloff like this month’s may provide an opportunity to tout the virtues of active management amid the boom in index-tracking, according to the UBS strategists, citing their flexibility to buy on market dips.

Both funds have beaten 95 percent of peers over the past five years.

Among speculative-grade companies, UBS recommends energy explorers as having the most-attractive valuations, whereas they expect healthcare, retail, and food industries to face a tough period as U.S. consumer consumption declines.

“If you’re disciplined when assets are expensive, you’re able to take advantage of cheapness later on,” Balls said. “It gives you the room to be counter-cyclical when markets are selling off.”

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A reality check in corporate bond markets has left Andrew Balls unimpressed. Pimco's chief investment officer for global fixed income is resisting buying on the dip in anticipation of a steeper correction.
credit, slump, pimco, prices
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2017-13-21
Tuesday, 21 November 2017 10:13 AM
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