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Prudential’s Lillard Says Buy CMBS as Bonds Overreacted

Prudential (PRU) Financial Inc.’s Michael Lillard said investors should buy commercial mortgage-backed securities and other bonds that fell on concerns the U.S. Federal Reserve will slow its pace of debt purchases.

The increase in yield provided by CMBS, emerging-market debt, high-yield bonds and bank debt makes those assets particularly attractive, said Lillard, who’s chief investment officer at Prudential Fixed Income. Newark, New Jersey-based Prudential, the second-largest U.S. life insurer, has more than $1 trillion under management.

“You’ve seen a big overreaction to the Federal Reserve,” Lillard said today at an event in New York. “We really think it’s a situation where commercial real estate is pretty solid.”

Fixed-income assets have fallen since May 22 when Fed Chairman Ben S. Bernanke told Congress that the central bank’s bond purchases may be reduced if the U.S. employment outlook shows sustained improvement. Bernanke said June 19 that the Fed could begin phasing out bond buying later this year and halt purchases around mid-2014 as long as the economy meets its forecast.

“Yields have overreacted here and they’re too high,” Lillard said. “In our portfolios right now, we’re actually somewhat long duration, and we expect yields to retrace.”

The 10-year Treasury (USGG10YR) yields 2.54 percent, up from 2.04 percent on May 22. Bond prices fall when yields rise.

Investors pulled a record $61.7 billion from U.S. listed bond mutual funds and exchange-traded funds this month through June 24, according to TrimTabs Investment Research.

Highest Quality

Lillard said he recommends the highest-quality CMBS issues. Investors are demanding 1.2 percentage points more than the benchmark swap rate to buy new CMBS tied to shopping malls, skyscrapers, hotels and apartment buildings, according to data compiled by Bloomberg. That’s up from 72 basis points in February, the narrowest spread since sales revived in 2009. A basis point is 0.01 percentage point.

The extra yield investors demand to own emerging-market debt over U.S. Treasuries was 382 basis points yesterday, compared with 278 basis points on May 22, according to index data from JPMorgan Chase & Co.

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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