Prudential Offers Secret to Illiquid Markets: `Buy Good Stuff'

  • Lillard says investors can't count on liquidity like in past
  • Mexico offers emerging markets opportunity, Prudential says

Michael Lillard, who oversees more than $500 billion as chief investment officer of Prudential Fixed Income, said bondholders must be prepared to keep securities for longer than in the past because it’s become tougher to enter and exit positions.

Liquidity is “less predictable,” he said Tuesday at a presentation by asset managers at life insurer Prudential Financial Inc. “You can’t count on it the way that you used to, and I think that changes your trading strategies a little.”

As the Federal Reserve prepares to raise interest rates for the first time in almost a decade, investors are concerned about the risk that bondholders will want to exit at once into a deteriorating market with few buyers available. Wall Street firms, constrained by stricter capital rules that made it costlier to act as the markets’ middlemen, have cut their stockpiles of debt to record-low levels.

“So don’t buy things that you don’t like. We think that’s the secret right now,” Lillard said at the presentation in New York. “If you buy good stuff, you’re OK with holding it.”

Lillard said that the premiums for taking risk in the bond market may decline, making stocks an attractive alternative. Within bonds, he likes high-yield securities, but not the riskiest credits. That means favoring investments in utilities and securities rated BB, he said.

The money manager said he still sees opportunities in emerging markets, as long as people are selective.

“There’s ways to be invested in the sector that you don’t have to be in the countries that have the biggest issues, like Brazil,” he said. “Mexico’s actually doing OK. It doesn’t have lots of exposure to commodities.”