Pimco’s Kiesel Favors Cash Over Junk as Europe Hits Recession

Pimco’s Kiesel Favors Cash Over Junk
Mark Kiesel, executive vice president and portfolio manager at Pacific Investment Management Co. Source: PIMCO via Bloomberg

Bond investors should cut risk and hold more cash as Europe’s sovereign debt crisis may lead to a recession that will hurt companies around the world, according to Pacific Investment Management Co.’s Mark Kiesel.

“Investors should wait to see whether policy makers can be effective in formulating a coordinated and credible solution for Europe before taking on more risk,” Kiesel, Pimco’s global head of corporate bond portfolios, wrote today in a report.

Pimco, the Newport Beach, California-based manager of the world’s largest bond fund, expects Europe to fall into a recession over the next year as policy makers cut spending and debt to avoid defaults by Greece and other heavily indebted countries, Kiesel said. He favors bank loans and debt issued by well-capitalized corporations over speculative bonds.

“It is too soon to be aggressively buying high yield now,” Kiesel said yesterday in an e-mail. “My sense is that you’ll get a better entry point and that it is best to remain cautious and wait.”

As investors speculated that Italy and Spain may be forced to follow Greece, Portugal and Ireland in seeking bailouts, high-yield, or junk, bonds dropped 4 percent last month, the most since November 2008, according to Bank of America Merrill Lynch index data. BlackRock Inc., the world’s biggest money manager, and JPMorgan Chase & Co.’s top-ranked high-yield strategist say the market is overestimating the chances companies will fail.

“We have a more cautious economic outlook than most,” Kiesel said in the e-mail. “Our portfolios have been building cash and taking a more defensive stance.”

‘Draconian Scenario’

James Keenan, who oversees BlackRock’s $28 billion leveraged finance unit, said in a Sept. 20 telephone interview that junk bonds are a “great long-term investment” as the market is “factoring in a pretty draconian scenario.”

JPMorgan’s Peter Acciavatti, the top high-yield strategist in Institutional Investor magazine’s annual poll, wrote in a Sept. 16 report that the junk bond market is in “good shape.” Relative yields on high-yield debt imply a default rate of 7.4 percent, more than the 6 percent peak rate that would likely be seen in a recession, Acciavatti wrote.

Mohamed El-Erian, chief executive officer and co-chief investment officer of Pimco, said at an event in Washington yesterday that the world is on the eve of a financial crisis and that the European Central Bank hasn’t put in place a “circuit breaker” to contain the region’s debt crisis. His co-chief investment officer at Pimco, Bill Gross, said on Twitter that “Euroland” is already in recession. Gross manages the $245.3 billion Pimco Total Return Fund, the largest bond fund.

Greece said yesterday it will accelerate budget cuts to keep emergency loans flowing, as leaders from the Group of 20 nations gather in Washington for the annual meetings of the World Bank and International Monetary Fund. Germany and other countries with strong finances will have to decide whether to keep helping struggling nations or “potentially move forward with a smaller, stronger group,” Kiesel wrote.

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