“This is a sector that makes money, has improved capital,” Kiesel, Pimco’s global head of corporate bond portfolios, said today in a Bloomberg Television interview. “From the debt side, it’s very attractive.”
Pimco, the Newport Beach, California-based manager of the world’s largest bond fund, has been wagering on U.S. bank debt since at least April 2008, when Kiesel said that big banks would “slim down” by raising capital and cutting leverage. Lenders have improved their balance sheets, making them a safe bet, Kiesel told Scarlet Fu on the network’s “In the Loop” program.
U.S. bank bonds have lost 1.53 percent this month, according to Bank of America Merrill Lynch index data, as investors shun borrowers facing more risk from a weakening economy and Europe’s spreading debt crisis. The extra yield, or spread, that investors demand to hold the debt rather than Treasuries expanded 1 basis point yesterday to 302 basis points, the widest gap since September 2009.
Credit-default swaps tied to the lender fell 2 basis points to 378.5 as of 5 p.m. in New York, according to data provider CMA. That pared an earlier surge to at least 445 basis points, which exceeded the peak during the financial crisis in March 2009, JPMorgan Chase & Co. analysts wrote in a report.
Valuations are becoming “irrational,” JPMorgan analysts Kabir Caprihan and Matthew Hughart based in New York wrote in the report. They changed their view on the debt to “neutral” from “underweight.”
Bank of America credit swaps have more than doubled from 178 basis points at the end of July as concern mounts that the lender may face larger losses tied to mortgages and will need to raise additional capital.
Contracts on Goldman Sachs Group Inc. (GS), the fifth-biggest U.S. bank by assets, fell 10 basis points to 245, according to data provider CMA. The swaps earlier rose to 283, the highest level since April 2009.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Debt issued by large, multinational companies is also a safe investment if the economy heads into a recession, Kiesel said. He recommended bonds issued by pipeline companies, metal producers and OAO Gazprom, Russia’s natural-gas export monopoly.
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