Photographer: Martin Leissl/Bloomberg

Pimco Says No Need to Be Greedy as It Bets on Battered Bank Debt

  • Money manager says corporate bond valuations `compelling'
  • Investor concerns about banks are overblown, Kiesel says

Pacific Investment Management Co. reckons investor concerns about banks are overblown and there’s money to be made in company bonds that have been beaten up amid recent financial market turmoil.

The fund manager, which oversees about $1.4 trillion, believes lenders have strong capital levels and bank notes will ultimately gain on demand from yield-deprived investors, according to Pimco’s global head of corporate bond portfolio management Mark Kiesel. He has been adding to his overweight position in bank securities and favors lenders in the U.S. as well as some firms in Switzerland and the U.K.

Mark Kiesel

Source: PIMCO

“The beauty of the market today is that you don’t actually have to be greedy or take a lot of subordination risk,” Kiesel said in an interview on Friday in Sydney. “You can stay relatively safe, stay senior and still get 4 to 5 percent.”

Investor jitters about banks and economic growth this week helped deepen a rout in riskier assets that’s driven global stocks into a bear market and pushed credit spreads wider. Fears about the outlook for Europe’s financial system have joined concerns about China’s economic prospects and plunging oil prices in undermining market confidence.

Bank equities around the world have plummeted and bond risk has risen, with European lenders among the most severely punished. The one-year cost of insuring debt from Deutsche Bank AG against default climbed to a record high this week amid concern about its contingent convertible bonds.

While Kiesel is mostly sticking with the more senior parts of banks’ capital structures, the fund manager is going further down the risk spectrum in some instances. He said that preferred stock in one of the strongest U.S. banks was offering about 8 percent, and also noted opportunities in Swiss and U.K. subordinated paper.

In addition to banks, Kiesel is positive about investment-grade credit more broadly.

“We haven’t been this excited about credit in about six or seven years,” he said. “If you look at valuations, that’s probably the most compelling reason to own credit today.”

He sees credit fundamentals being underpinned by a “healthy” U.S. economy that’s capable of generating 2 percent growth, with core inflation reaching 2 percent by the end of 2016.

Consumer Strength

“Fundamentally the U.S. economy is really led by the consumer, and the consumer’s in a very good place,” Kiesel said. “We want to stay high quality and we want to stay focused on the sectors and industries which have the best fundamentals.”

The Newport, California-based money manager likes instruments that are exposed to the U.S. housing sector such as non-agency mortgage bonds and debt from building materials companies. He also sees opportunities in health care, pharmaceuticals and medical devices, and has been buying “selectively” in the energy sector.

In speculative-grade debt, Pimco is “playing it defensively” by steering clear of resource companies, and has built positions in industries like health care and building materials.

The prospect of an increase in U.S. interest rates is another factor that will help credit investments, according to Kiesel. While markets have currently dialed back their expectations for Federal Reserve rate hikes, Pimco reckons accelerating inflation will act as a spur to further monetary tightening and help constrict corporate note supply. At the same time, negative rates in Japan and the euro area are likely to bolster demand for bonds that yield more than sovereign debt.

“I believe that investors all over the world will increasingly allocate more money to the credit markets throughout this year,” he said. “Now is the time to move into credit.”

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