Mark Kiesel, head of corporate-bond investment at Pacific Investment Management Co. (PIMCO), said corporate bonds, particularly specific financial-sector bonds, likely will top Treasuries in 2010. After falling in late 2008, corporate bonds have rallied this year. However, Kiesel cautioned that risks remain.
In a note to investors on Dec. 28, 2009, Kiesel did not recommend any specific companies’ bonds, but pointed out overall financial sector strengths like healthier balance sheets, the increase in loss-absorbing common equity and regulatory efforts to help cushion balance sheets and protect bondholders from asset-quality deterioration.
Kiesel cited the following risks to the financial sector in 2010: a weak economy or double-dip recession that would hurt both residential and commercial real-estate prices, pulling banks’ asset quality down with it; the Federal Reserve opting to raise the benchmark federal-funds rate, which would hurt banks’ profitability; and financial reform regulation and legislation that could hurt banks’ investments or force them to raise more capital, which would lower shareholder returns.
While investment grade bonds should provide decent returns and a safe haven in 2010, investors are still quite interested in high-yield debt, according to a Bloomberg report. Investors are indicating that they prefer high-yield, high-risk debt to investment-grade bonds, prompting corporate borrowers to sell at least $1.36 billion in bonds. “The perception, now that we’re exiting this recession, is the default risk for some of the issuers drops,” said Malcolm Polley, chief investment officer at Stewart Capital Advisors. “People are looking for yield pretty much regardless of what the risk involved is.”
Investors looking for a relatively easy way to allocate assets toward investment grade or high-yield bonds may consider exchange traded funds. Two examples are iShares IBoxx Investment Grade Corporate Bonds (symbol: LQD) and iShares IBoxx High Yield Corporate Bonds (HYG).
Gregg D. Killoren
victoria1014
