Aberdeen Asset Buys Goldman Sachs Bonds as Yield Premiums PaidFinbarr Flynn
Aberdeen Asset Management Plc bought bonds sold by Goldman Sachs Group Inc. and Morgan Stanley this week after risk aversion pushed up yield premiums.
Morgan Stanley issued $3 billion of 10-year notes on Oct. 20, while Goldman Sachs sold $2.5 billion of five-year debt, according to data compiled by Bloomberg. The yield premium on U.S. corporate bonds rose to the highest in eight months last week as investors shunned all but the safest assets. Issuers offering higher spreads are luring them back.
“There was a good 10 to 15 basis-point concession probably because the underwriters on both wanted to get the deals done, done properly, and have them trade well,” Oliver Boulind, the head of global credit at Aberdeen, which has about $535 billion in assets under management, said in a phone interview on Oct. 21. “Senior banks are worth spending some time on, though the problem with that trade is it will come and go quite quickly.”
A drop in U.S. retail sales and concern Europe may be heading for a recession pushed yields on speculative-grade bonds to their highest in a year last week as investors poured money into Treasuries in a flight to safety. The International Monetary Fund earlier this month reduced its forecasts for 2015 global growth, and Federal Reserve officials expressed concern deteriorating expansion abroad and a stronger dollar could hurt exports and damp inflation.
Morgan Stanley’s notes were sold at a yield premium of 155 basis points more than benchmark rates. That compares with an about 144 basis-point spread for its similar-maturity bonds issued in April, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Goldman Sachs’s notes were issued at an 120 basis-point premium, or 1.2 percentage points, Bloomberg-compiled data show.
The “dislocation” in credit markets means Aberdeen, which in fixed income manages about 72.2 billion pounds ($116 billion), needs to be extremely careful about the size of the positions and may need to shrink some of them, according to Boulind. With increased volatility in markets and “vicious” moves last week, the money manager doesn’t want any one fixed income investment driving performance, he said.
Ten-year Treasury yields fell one basis point to 2.21 percent as of 11:10 a.m. in Tokyo, after Europe worries drove them down to 1.86 percent on Oct. 15, the lowest level in since May 2013, Bloomberg Bond Trader data show. The spread on U.S. high-yield debt has widened as much as 173 basis points since June, and offers investors an average rate of 6.29 percent.
Aberdeen remains bullish about U.S. junk bonds, according to Boulind. “Defaults are going to remain quite benign and with yields approaching 6.5 percent for high yield, it is tough not be interested in talking about good double BB and single B companies,” he said from London. “I still think high yield’s good value, and it is a lot better now.”
Boulind said he likes bonds with those ratings from industrial companies, while service providers with low margins, such as retailers, are more risky.
Strong employment and capital expenditure data mean the Fed will probably increase interest rates in the second or third quarter of next year, as more slack is taken out of the expanding U.S. economy, he said. With the prices of European bonds rising, Aberdeen is moving some money out of euros and into dollar-denominated securities, Boulind said.
The spread on European corporate bonds has declined 19 basis points this year to 98 yesterday, Bank of America Merrill Lynch data show.
“European credit has really outperformed and sort of begs the question whether it is either completely overvalued or it is rich and can potentially go even richer,” Boulind said. “We have been sort of on the margin selling a little bit of euro to buy dollar securities but it hasn’t been wholesale yet. But that is the trade that kind of screams at you right now.”