With the potential prospect of a further narrowing of spreads, US fixed income fund managers are maintaining their key positions in corporate bonds, including investment grade and high yield, says Standard & Poor’s Fund Services in its latest sector update.
“Low cash and government bond yields continue to attract investments into corporate bonds and other higher yielding asset classes,” says S&P fund analyst, Markus Graf.
“Default rates are expected to decline in the foreseeable future and some managers anticipate the high yield corporate default rate falling to three per cent, well below the current 12-month trailing and long-term average rate of about five per cent.”
Pioneer’s chief investment officer Kenneth Taubes believes that inflows into the high yield market are justified, due to attractive credit spreads, and companies being in good shape and in debt repayment mode. However, Taubes, like many others, is sticking to the better quality high yield paper.
The team at Natixis also maintained its focus on corporate bonds, taking advantage of volatility in late spring 2010 to selectively add banks and other high-beta names. It saw value in both investment grade (BBB and A) and high yield (BB and B) paper.
Despite convertibles detracting as equity markets struggled, several funds continued to find value in equities and increased exposure as a result. Natixis took advantage of cheap conversion options and increased convertibles exposure to nine per cent in September.
Pioneer’s Taubes has also bought convertibles, based on his view that equities are fairly valued and have never been cheaper relative to investment grade bonds.
The only fund manager to be strongly positive on agency MBS was Akiva Dickstein at BlackRock, who felt the paper has become increasingly attractive, offering yields comparable to corporates. Meanwhile, the team running Pimco’s Total Return Fund has cut its underweight to agency MBS by about half since the start of the year.
Despite the recent announcement by the National Bureau of Economic Research that the US recession ended in 2009, the recovery has lost momentum in the opinion of those interviewed.
“Fund managers were less optimistic about the US economic outlook than they were in early 2010,” says Graf. “The majority expect subdued growth and low inflation to persist for some time.”