Funds Rejecting Fed as Reckless See Loss in ’13: Credit MarketsLisa Abramowicz
Credit-fund managers who have attracted $45 billion this year expecting to profit from rising volatility in the bond markets are proving such strategies are little more than a Sisyphean task.
Funds run by firms from Pacific Investment Management Co. to Eaton Vance Corp. that seek to profit whether prices rise or fall are losing an average 0.3 percent in 2013, trailing the 5.5 percent returns of mutual funds that track junk-bond indexes, according to Morningstar Inc. A $239 million fund run by CQS U.K. LLP’s Simon Finch designed to profit when price swings increase lost 4.92 percent through October, the most among 31 global credit hedge funds tracked by HSBC Holdings Plc.
Investors who funneled a record amount into the so-called flexible funds this year are finding that doing anything other than betting on the Federal Reserve’s largess is a losing trade. Even as economists forecast the central bank will start paring $85 billion of monthly bond purchases in March, yields on corporate debt from the riskiest to most-creditworthy are still yielding 0.2 percentage point less than the average of the past two years.
“It’s very difficult to take a bearish view because of the abundant liquidity available,” said J.J. McKoan, a portfolio manager at First Eagle Investment Management LLC in New York. “It’s consensus that rates are going up. People have been saying that for four years. Unless you can time it with precision, it’s a very tough way to make money.”
The degree of price swings, or volatility, in Treasuries as measured by Bank of America Merrill Lynch’s MOVE index has fallen to 62 compared with an average 72 this year and 95 over the past decade.
Pimco’s $28.6 billion Unconstrained Bond Fund, which isn’t required to track a specific index, is down 1.5 percent this year, according to data compiled by Bloomberg. That compares with a 0.9 percent loss for the firm’s flagship Total Return Fund, which has $247.9 billion of assets, the data show.
Eaton Vance’s $6.25 billion Global Macro Absolute Return Fund, which trades in bonds and derivatives and also doesn’t track an index, has lost 1.2 percent, Bloomberg data show.
“We view valuations in many areas of the credit markets to be quite rich, but spreads have continued to grind tighter,” Brad Godfrey, an institutional portfolio manager who helps oversee the fund, said in a telephone interview. While the fund doesn’t make direct wagers on the direction of U.S. interest rates, “we have struggled to make money” in some of its positions in currencies and in wagers that sovereign debt would lose value, he said.
Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, didn’t respond to an e-mail seeking comment. Michael Rummel, a CQS spokesman, said he couldn’t comment on the long-short fund’s performance.
While the CQS fund is down for a second year after taking positions that were more bearish than bullish, the $12 billion hedge-fund firm’s $2.2 billion Directional Opportunities Feeder Fund is up 12.2 percent this year after adopting a generally positive view of credit, according to HSBC data.
Central banks of nations from Japan to Peru have suppressed benchmark borrowing costs as they seek to galvanize a global economy that’s expected to have expanded by 2.02 percent this year, from 2.21 percent in 2012, according to economists surveyed by Bloomberg.
In the U.S., Fed policies that have pumped more than $3 trillion into the financial system and held the central bank’s interest-rate target near zero for almost five years have handed debt investors average annual gains of 9.45 percent since the end of 2008, as measured by the Bank of America Merrill Lynch Global Corporate & High Yield Index. Yields on the notes dropped to a record-low 3.09 percent on May 2.
The stimulus is leaving money managers girding for a market shift like Sisyphus, the king in Greek mythology doomed for eternity to roll a boulder uphill, only to watch it tumble down again.
“It’s been very hard to be short credit because central bank liquidity has continued to push investors into riskier assets,” said Alberto Gallo, head of European macro research at Royal Bank of Scotland Group Plc. “You can be right in the long run, but taking a short view today for something that’s going to happen in six months is very dangerous.”
While yields on corporate debt soared to as high as 3.97 percent on Sept. 5 after Fed Chairman Ben S. Bernanke said policy makers could taper stimulus on signs of sustained economic improvement, they’ve fallen to 3.59 percent as data emerges indicating that growth is slowing. More Americans than forecast filed applications for unemployment benefits in the week ended Nov. 9, signaling labor-market progress will be fitful, according to the Labor Department.
Janet Yellen, who’s been nominated to replace Bernanke when his term expires Jan. 31, indicated last week that she’ll maintain the central bank’s unprecedented monetary stimulus until she sees a robust recovery.
Unemployment is “still too high, reflecting a labor market and economy performing far short of their potential,” Yellen said during her nomination hearing before the Senate Banking Committee. Inflation is expected to remain below the Fed’s goal of 2 percent, she said.
“All of this is pointing to the fact that there will be more liquidity shoveled into the market,” Arthur Tetyevsky, a credit strategist at Imperial Capital LLC, said in a telephone interview. “Future outperformance will be measured on a much smaller scale than over the past few years, since the market is no longer suffering from dislocations originally caused by the liquidity drought in 2008 and 2009.”
The $45 billion of deposits into the flexible, or nontraditional, funds tracked by Morningstar compare with $3.1 billion of withdrawals from speculative-grade debt funds in the first nine months of the year. Investors yanked an unprecedented $61.8 billion from broad-market taxable bond funds in the period, the most ever, the data show.
The nontraditional category, the most popular of taxable bond funds this year, refers to strategies that seek to avoid losses and produce returns uncorrelated with the overall bond market, according to the data.
“Generally speaking, the investment approaches of the last several years involve a quest for diversification,” said Neal Epstein, a senior credit officer at Moody’s Investors Service. “Lately, interest rates have been rising sporadically up and down, so that’s been tricky for people to play.”
Elsewhere in credit markets, a unit of T-Mobile US Inc., the nation’s fourth-largest mobile-phone carrier, plans to issue $2 billion of senior notes. General Nutrition Centers Inc., the health-product and nutritional-supplement provider, is seeking a $1.35 billion term loan to refinance debt.
The cost to protect against losses on corporate bonds in the U.S. was little changed. The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, decreased 0.04 basis point to 70.3 basis points as of 11:21 a.m. in New York, according to prices compiled by Bloomberg.
In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 0.8 to 79.8.
The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
T-Mobile USA Inc. intends to sell bonds due in 2022 that can be redeemed in four years and securities that mature in 2024 that can be called in five years, the Bellevue, Washington-based company said in a statement today.
Proceeds from the sale may be used for general corporate purposes, including capital investments, enhancing financial flexibility and purchasing additional spectrum, according to the release.
JPMorgan Chase & Co. is leading the General Nutrition financing and will host a lender call today at 2 p.m. in New York, according to a person with knowledge of the transaction, who asked not to be identified because terms aren’t set. The term loan B, debt that’s sold mainly to non-bank lenders such as collateralized loan obligations, mutual funds and hedge funds, is due March 2019, according to the person.
The company is proposing to pay interest at 2.5 percentage points more than the London interbank offered rate, with a 0.75 percent minimum on the lending benchmark, the person said. That’s down from 2.75 percentage points more than Libor, with a 1 percent floor on a $1.1 billion loan that was obtained in October 2012, Bloomberg data show.
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