Pioneer Sees Rising Volatility in Low-Grade Debt on Tapering
Pioneer Investments, which manages the equivalent of $227 billion, expects volatility to rise in lower-grade corporate bonds once the Federal Reserve starts to slow monetary stimulus that’s propped up asset prices worldwide.
The fund manager’s concern comes after an index measuring returns on global high-yielding debt, including securities issued by Dell Inc. and Royal Bank of Scotland Group Plc., climbed to a record this week, according to data compiled by Bank of America Merrill Lynch. A separate gauge of emerging-market sovereign debt has dropped 3.8 percent from a record high in May, the month when Fed Chairman Ben S. Bernanke said the central bank could start to slow stimulus.
Benchmark 10-year Treasury yields have almost doubled in the past six months as policy makers flagged the possibility the U.S. central bank will reduce its $85 billion a month in purchases of government and mortgage debt. Even so, market volatility has remained near the lowest level since before the global financial crisis erupted in 2008.
“Emerging-market local bonds lost quite a lot this summer, but high yields in the U.S. haven’t lost much,” Tanguy Le Saout, the Dublin-based head of European fixed income at Pioneer Investments, said in a phone interview yesterday. “Maybe high yields could have a rocky road next year” as the Fed starts to taper, he said.
Merrill Lynch’s Market Risk index, which measures future price swings implied by options for global stocks, rates, currencies and commodities, was negative 0.94 this week. It hit negative 1.06 in January, the lowest since June 2007. Levels below zero indicate less-than-usual stress in the markets.
Junk-rated notes returned 6 percent this year, compared with a 0.1 percent loss for investment-grade debt, Bank of America global indexes show.
Le Saout said Pioneer bought Japan’s inflation-linked bonds last month. The government sold 300 billion yen ($3 billion) of securities on Oct. 8 for the first time in five years.
The yield gap between nominal debt and similar-maturity inflation notes signals a 0.98 percent annual increase in consumer prices over 10 years, according to the breakeven rate. The Bank of Japan aims to accelerate inflation to 2 percent by 2015 from 0.7 percent in September.
“We are betting on re-pricing of higher expectation for inflation in Japan,” said Le Saout, declining to disclose how much inflation debt Pioneer bought. “It was quite cheap.”
The price of Japan’s linkers collapsed to a record in December 2008 as the global financial turmoil deepened deflation in the world’s third-largest economy. The securities have since recovered as the finance ministry bought them. Inflation bonds issued last month guarantee the principal upon maturity in contrast to their predecessors.
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