Don’t Be Lured by Energy Debt Gain as Defaults Loom, Peters Says

  • Prudential’s Peters says other high yield bonds attractive
  • U.S. banks provide opporunity for bond investors, he says

Gregory Peters, who helps manage more than $600 billion at Prudential Financial Inc.’s fixed-income operation, said he’s staying away from junk energy bonds even after the recent rise in oil prices.

“We see tremendous amounts of defaults over the next few years in that space, so we’re avoiding the energy space and avoiding the commodity space,” Peters said Thursday in an interview with Bloomberg Television. “Outside of that, high yield looks really attractive both here in the U.S. and in Europe.”

Yields on junk energy bonds dropped to 9.6 percent Wednesday after reaching a peak of 21 percent in February, according to the Bank of America Merrill Lynch U.S. High Yield Energy Index. That coincided with a surge in oil prices as attacks on pipelines from Nigeria to Colombia, wildfires in Canada and a slowdown in U.S. output cut into global supplies.

Bond investors are confronting volatility tied to energy market fluctuations and the decision last week by U.K. voters to leave the European Union. Also, Federal Reserve officials Wednesday failed the U.S. subsidiaries of Germany’s Deutsche Bank AG and Spain’s Banco Santander SA in annual stress tests while clearing large domestic banks.

Banking Value

Peters said he favors bonds of U.S. lenders, especially compared with European rivals that he considers less capitalized and more levered.

“The U.S. banking sector represents, still, a lot of value from the fixed-income side,” he said. “From an equity perspective, I’m less sure. I don’t see the return on capital, the return on assets that is required to make it a good equity investment, but I think it’s a tremendous fixed income investment.”

Peters is a former strategist at Morgan Stanley, who correctly warned in 2007 that mortgage losses risked causing a financial crisis. He joined the Newark, New Jersey-based insurer two years ago and is a portfolio manager for the Prudential Total Return Bond Fund, which beat 90 percent of its peers over the past year, according to data compiled by Bloomberg.

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