SocGen's Lyxor Favors Corporate Bonds as Volatility Shakes Stock Markets
Societe Generale SA’s Lyxor Asset Management SA unit, which oversees $100 billion, is favoring corporate bonds over equities as defaults decline while stock markets slump on concern the recovery is faltering.
“Credit, and specifically high-yield, offers attractive coupons with lesser volatility than equity markets,” Florence Barjou, a portfolio manager for Lyxor, said in a telephone interview from Paris. “At the current juncture of the cycle, even if growth is set to weaken, defaults should remain low.”
Investors withdrew a net $7.1 billion from equity funds in the week ended Aug. 25 while bond funds attracted $5.2 billion, according to EPFR Global. Investment-grade corporate bonds returned 8.63 percent this year as high-yield debt delivered 9.29 percent, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Index of shares fell 5.9 percent in the same period, even after a 6.88 percent jump in July, on concern the economic recovery is in jeopardy.
Defaults by companies rated at Standard & Poor’s fell to 52 this year compared with 265 in 2009, the risk assessor said on Aug. 27. “A modest amount of maturing debt over the next four quarters is one of the key factors that should keep default rates low in the one-year forecast horizon,” S&P analysts led by Diane Vazza said in a statement.
Busiest August
Global sales of high-yield or junk bonds climbed to $25.6 billion last month, the busiest August since 2006, according to data compiled by Bloomberg. Companies are increasing issuance to take advantage of some of the lowest borrowing costs on record.
Speculative-grade bonds yielded an average 8.93 percent this year compared to 14.49 percent last year and 13.27 percent in 2008, according to Bank of America Corp.’s Global High Yield Index. The yield on 10-year Treasuries fell 43 basis points to 2.47 percent in August, the biggest monthly decrease since it fell 71 basis points in December 2008 after the Federal Reserve cut its target lending rate to a range of zero to 0.25 percent.
“When you keep in mind the now very low level of yield on government bonds across the globe, a corporate bond paying 8 percent, 9 percent or 10 percent is extremely attractive,” Barjou said.
Lyxor has added managers with expertise in corporate debt to capitalize on investor demand for the securities, she said.
Bonds are gaining as companies hoard capital for insurance against a downturn, according to Viktor Hjort, a Hong Kong-based credit strategist at Morgan Stanley.
“Corporates have raised a lot of funds and cash but they’ve been very hesitant to put that cash to use,” Hjort said in a phone interview. “That means they’re investing less in the future of their own businesses, and they’re also less aggressive in terms of taking advantage of merger and acquisition opportunities. That’s good for a bondholder, but is not what an equityholder is after.”
To contact the reporters on this story: Shelley Smith in Hong Kong at ssmith118@bloomberg.net Tom Kohn in Hong Kong at tkohn@bloomberg.net
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