Investors are “finally” acknowledging the risks of holding corporate bonds with yields hovering at about record lows as the Federal Reserve holds benchmark interest rates at close to zero for a fifth year, according to Pacific Investment Management Co.
“Bondholders are finally starting to wake up to the fact that easy monetary policy for an extended period can also have adverse consequences,” Mark Kiesel, global head of corporate bond portfolios at the manager of the world’s biggest bond fund, wrote today on the firm’s website. “This trend has helped reignite shareholder activism and corporate animal spirits.”
The central bank has held its target rate at between zero and 0.25 percent since December 2008, sending corporate bond yields to a record low of 3.52 percent on Jan. 23, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Index. Companies issued the most debt on record last year at $3.96 trillion, according to data compiled by Bloomberg.
Pimco has been “cautious” in industries that may add debt or that are paying out cash to shareholders, such as technology, retail and pharmaceuticals, Kiesel wrote. The Newport Beach, California-based bond fund manager is also avoiding companies in the defense, gold mining and supermarket segments, given their weak outlook.
Bill Gross, co-chief investment officer at Pimco, warned investors last month that credit was “somewhat exuberantly and irrationally priced.” Former Fed Chairman Alan Greenspan coined the phrase “irrational exuberance” in a December 1996 speech, in which he asked, “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?”
Pimco is favoring companies that have “solid” revenue growth, such as those related to U.S. housing, pipelines and gaming. Low mortgage rates and a limited housing inventory are pushing up demand for properties, leading to higher prices. Pipelines have benefited from increases to natural gas production and the rise in disposable income in Asia is helping fuel growth in gaming, Kiesel wrote. The company has recommended those sectors since at least August.