Barclays Wealth Goes to Cash Selling ‘Expensive’ Corporate Debt
Investment-grade corporate bonds are too ‘expensive’ relative to other asset classes as the securities stand to gain less from the global economic recovery, according to Barclays Wealth.
The unit of Barclays Plc (BARC) is selling the bonds and adding to cash and developed market equities this quarter, said Kevin Gardiner, head of global investment strategy at the money manager, which oversees $254 billion.
“Of the fixed-income markets we’re looking at, investment- grade credit looks the worst, looks the most expensive,” Gardiner said at a press briefing today in New York. “Because these are blue-chip companies to begin with, there’s not much of a recovery in creditworthiness essentially to anticipate. There’s also going to be a revival in merger and acquisition activity out there, and gradually, that’s going to count against IG credit.”
Investment-grade corporate bonds have gained 33 percent since the end of 2008 as the economic recovery gained traction and companies bolstered their balance sheets. The extra yield investors demand to own the debt relative to Treasuries tumbled to as low as 148 basis points, or 1.48 percentage points, last quarter, the least since October 2007, Bank of America Merrill Lynch index data show.
Spreads on investment-grade debt are “back to normal” and the asset class is “relatively insensitive to both corporate recovery and geopolitical risk,” Barclays Wealth said in its global strategy outlook presentation.
The U.S. economy expanded at a 3.1 percent annual rate in the fourth quarter, Commerce Department figures showed March 25, and it may grow 3 percent this year, the most since 2005, according to the median estimate of 65 analysts in a Bloomberg News survey. Manufacturing increased at about the fastest pace in almost seven years in March and the unemployment rate declined to 8.8 percent, the lowest since March 2009, reports showed last week. That’s boosting the relative appeal of riskier asset classes, including high-yield bonds and stocks.
Investment-grade bond prices average 107.1 cents on the dollar as of yesterday, compared with 88.8 cents two years ago, according to Bank of America Merrill Lynch index data. Mergers and acquisitions were cited by borrowers as a use of proceeds in 62 percent of investment-grade offerings this quarter, the highest proportion since at least 2005, data from Moody’s Corp. and Dealogic Holdings Plc show.
The 0.98 percent return on investment-grade corporate bonds in the first quarter, including reinvested dividends, compares with a 5.9 percent gain on the Standard & Poor’s 500 Index and 3.9 percent on high-yield debt.
“We’d sooner be in cash now than we would in bonds, particularly in the corporate credit side of the portfolio,” Gardiner said.
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