Finance Debt Risky Amid Rescue Uncertainty, Seix’s Keegan Says
Financial-company debt isn’t offering sufficient yield to be attractive because U.S. citizens may object to any additional bailouts if the Federal Reserve fails to jumpstart the economy, Seix Investment Advisors Inc. Chief Investment Officer Jim Keegan said.
Keegan’s firm, which manages $25 billion of assets from Upper Saddle River, New Jersey, is limiting its holdings of the bonds and using credit-default swaps to bet the perceived risk of certain issues will rise, he said today.
Investors are speculating the Fed may announce plans to buy more debt to revive the economy as soon as next week. The central bank can’t do enough to accelerate growth, creating “very high” odds for a new recession that further hurts banks, Keegan said. While some money managers buy their bonds because they believe a repeat of the government’s 2008 and 2009 assistance would protect them, Keegan doesn’t know if “the country is willing” to allow new rescues and views it as a bad policy to count on such aid, he said.
“How could I ever go to a client and say, I owned Lehman because I thought they were going to get bailed out?” he said in an interview in New York at Bloomberg News headquarters, referring to the record bankruptcy filing by Lehman Brother Financial Inc. in September 2008.
Keegan wouldn’t name the companies whose bonds he has bet against using default swaps, saying that because the positions were recent additions they probably wouldn’t show up in disclosures for mutual funds managed by Seix.
RidgeWorth Fund
The RidgeWorth Total Return Bond Fund, which Keegan co- manages, has returned 6.81 percent annually over the past five years, beating 84 percent of competitors. The $774 million fund has returned 7.24 percent this year, better than 36 percent.
Bank bonds have returned 9.99 percent this year, lagging behind the overall investment-grade corporate bond market’s 10.9 percent gain as of Oct. 27, according to Bank of America Merrill Lynch index data.
Banking company debt yields this year have narrowed 21 basis points to 222 basis points more than similar-maturity Treasuries, falling again to near the lowest since May after spreads widened earlier this month on concern that lenders would need to repurchase bad mortgages, the index data show. Relative yields on investment-grade bonds have tightened 14 basis points to 176 basis points, or 1.76 percentage point.
Keegan said he also disagrees with the idea that regulators should require banks to sell a type of debt that would be automatically converted to stock or written off if the seller needs capital. The use of so-called contingent capital notes, sometimes called CoCos, was proposed by the Basel Committee on Banking Supervision in an August consultative paper.
Regulators should simply allow investors in the bonds of failing banks to take losses, which they could have done during the financial crisis at least as late as the Fed’s March 2008 rescue of Bear Stearns Cos. and averted bigger costs, he said. After Lehman failed, lawmakers authorized the $700 billion Troubled Asset Relief Program.
“Bondholders who facilitated the bubble should have paid the price,” Keegan said.
To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net
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