Mark Kiesel, the Pacific Investment Management Co. bond manager who sold his home in 2006 before the U.S. property market collapsed, says he’s remodeling the house he purchased last year as he wagers prices will climb further.
The housing market may deliver “mid-single-digit annual gains for the next few years, particularly if low inflation allows the Federal Reserve to maintain accommodative monetary policy,” Kiesel wrote in a report published today on Pimco’s website. The world’s largest bond-fund manager is favoring “select investments” among homebuilders, appliance makers and banks, said Kiesel, the firm’s global head of corporate bonds.
Home prices are rebounding nationwide, buoyed by investors such as New York-based Blackstone Group LP that have acquired thousands of foreclosed homes at discounts before renovating and renting them. Kiesel, who rented for six years before buying a house in Newport Beach, California, where Pimco is based, said he’s has been repairing and remodeling the property over the past year and a half.
“Higher housing prices should lead to a pickup in home sales, more housing starts, a gradual increase in bank lending and a boost in remodel activity,” Kiesel wrote in the report. “The mortgage market, previously refinance-driven, should increasingly ‘hand off’ to growing home purchase loan originations.”
Toll Brothers Inc., the largest U.S. luxury-home builder, issued $350 million of 4 percent, five-year notes in November to yield 254.5 basis points more than Treasuries. The bonds have since climbed to 101.88 cents on the dollar to yield 3.59 percent, or 205 more than government debt.
The extra yield investors demand to own Home Depot Inc. (HD)’s $1.1 billion of 3.75 percent bonds due 2024 has narrowed 10.7 basis points to 84.3 since the largest U.S. home-improvement retailer issued the debt in September. The same month, its largest competitor Lowe’s Cos. (LOW) borrowed $500 million with 3.875 percent notes due 2023 at a spread of 105. The gap has since narrowed to 81.8 basis points.
Spreads on bonds of investment-grade manufacturers of household durables from Newell Rubbermaid Inc. (NWL) to Whirlpool Corp. (WHR) have contracted by about 20 basis points this year to an average spread of 172.5 basis points, according to data compiled by Bloomberg. That compares with a current average relative yield of 127 for the $3.75 trillion of bonds in the Bloomberg U.S. Corporate Bond Index. (BUSC)
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