markets

Pimco Sells Australia Banks, Property Bonds as Risks Climb

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  • Manager sees opportunities to buy infrastructure, energy bonds
  • AMP eyes shorts in highly leveraged real-estate companies
Bloomberg’s Ruth Carson discusses why Pimco is cutting its investments in Australian bank debt.

Pacific Investment Management Co. is cutting its investments in Australian bank debt because of lofty valuations as well as trimming holdings of real estate and retailers’ bonds.

The unwinding of some of its holdings in Australian lenders’ debt is the first such move in about five years by the $1.75 trillion money manager. Pimco’s reduction of its exposure to notes sold by real estate investment trusts and retailers Down Under reflects concerns that surging personal debt will constrain consumption, according to Aaditya Thakur, senior vice president and portfolio manager in Sydney.

“The macro fundamentals keep us relatively positive on risk assets, but where we’re cautious is the overall valuations in credit which are now getting quite tight,” said Thakur, who is cutting some of Pimco’s holdings in longer-dated bank paper. “We don’t think there’s a lot of premium in the current levels of spreads to act as a buffer or provide protection for any unexpected negative news in the market.”

Read More: Bank Misconduct Under Scrutiny as Australia Inquiry Starts

Higher-yielding corporate bonds have been the darlings of Australian debt investors in recent years as they sought havens from record-low interest rates. A Bloomberg Barclays index of Australian dollar-denominated corporate bonds gained 27 percent over the past five years, ahead of the 22 percent return from Australian government debt. As prices of corporate notes climb and yields decrease, money managers are now looking to re-position their portfolios against a backdrop of rising global interest rates.

Shorting Opportunities

AMP Capital Investors Ltd. is on the lookout for opportunities to short, or make bets on declines in, highly leveraged Australian real-estate companies that have amassed debt in recent years. The era of cheaper money is ending, putting pressure on some companies’ ability to repay debt, according to Nader Naeimi, head of dynamic markets at AMP who helps oversee more than $100 billion.

“There will be isolated blow-ups,” Naeimi said.

Pimco favors notes sold by infrastructure and energy companies. The fund manager likes airports because of a pickup in traffic volumes, relatively steady oil prices and a stable Australian dollar. It also likes pipelines and toll roads.

The oil and energy sectors are also attractive. After a long period of capital investment, companies are reporting improved revenue and earnings, allowing firms to reduce debt, Thakur said.

Risk assets are vulnerable to a correction as valuations approach fair value, Thakur and John Dwyer, vice president and credit research analyst, wrote in a report.

“This risk becomes more important as we transition to a period of gradual tightening of monetary policy by global central banks,” according to the report. Asset prices offer little buffer to the risk of possible shocks resulting from negative growth surprises or higher-than-expected inflation, they said.

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