Archive for the ‘Investment Grade Debt’ Category

Bill Gross of PIMCO Dumps U.S. Treasuries

Thursday, March 10th, 2011

As a follow up to our story on shorting treasuries using TMV, the Direxion Daily 30+ year treasury bear, the LA team wanted to discuss Bill Gross’s move to dump government securities.  Bill Gross runs the world’s largest bond fund and has surprisingly decreased his treasury holdings completely.  His fund is now in 23% cash, the highest cash balance since 2008.  PIMCO manages $1.24 trillion of assets, mainly fixed income securities.  According to Gross, if the U.S. transitions into quantitative easing v3 (QEIII), yields on government securities will may increase 150 bps by 2012, resulting in large gains for those net short the 30 year treasury.

According to Bloomberg, “Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., eliminated government-related debt from his flagship fund last month as the U.S. projected record budget deficits.

Pimco’s $237 billion Total Return Fund last held zero government-related debt in January 2009. Gross had cut the holdings to 12 percent of assets in January, according to the company’s site. The fund’s net cash-and-equivalent position surged from 5 percent to 23 percent in February, the highest since May 2008.

Yields on Treasuries may be too low to sustain demand for government debt as the Fed approaches the end of its second round of quantitative easing, Gross wrote in a monthly investment outlook posted on Pimco’s website on March 2. Gross mentioned that Pimco may be a buyer of Treasuries if yields rise to attractive levels.

Treasury yields are about 150 basis points too low when viewed on a historical context and when compared with expected nominal gross domestic product growth of 5 percent, he wrote in the commentary. The Fed is scheduled to complete purchases of $600 billion of Treasuries in June.

Gross in his February commentary urged investors to reduce holdings of Treasuries and U.K. gilts and buy higher-returning securities such as debt from emerging-market nations. “Old- fashioned gilts and Treasury bonds may need to be ‘exorcised’ from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint,” Gross wrote.

Emerging-Market Debt

Gross last month increased holdings of emerging-market debt to 10 percent, the highest since October, from 9 percent in January. He cut holdings of mortgage securities to 34 percent from 42 percent in January.

The Zero Hedge website first reported the change in assets today. Pimco doesn’t comment on changes in holdings.

Treasuries returned 5.9 percent in 2010, according to Bank of America Merrill Lynch Indexes. The securities lost 0.6 percent so far this year.

Ten-year Treasury yields have risen for each of the past six months, according to data compiled by Bloomberg, the longest run since June 2006, as the economy showed signs of improvement and prices of commodities climbed. The 10-year yield fell six basis points to 3.48 percent today.

Gross kept the holdings of non-U.S. developed debt at 5 percent in February.

Inflation Outlook

Gross’ fund has returned 7.23 percent in the past year, beating 85 percent of its peers, according to data compiled by Bloomberg. It gained 1.39 percent over the past month.

As the Fed maintains its target rate at a record low range of zero to 0.25 percent and has made an increase in inflation a cornerstone of its monetary policy, Gross noted that inflation may be a bigger factor than many suggest.

Gains in so-called headline inflation matter more for the U.S. than Fed Chairman Bernanke suggests and rising oil prices may cut U.S. gross domestic product by a quarter to half a percentage point, Gross said March 4 in a radio interview on “Bloomberg Surveillance” with Tom Keene.

“Bernanke tends to think this doesn’t matter — at least in terms of headline versus the core — we do,” Gross said.

Pimco’s U.S. government-related debt category can include conventional and inflation-linked Treasuries, agency debt, interest-rate derivatives, Treasury futures and options and bank debt backed by the Federal Deposit Insurance Corp., according to the company’s website. The fund can have a so-called negative position by using derivatives, futures or by shorting.

Derivatives are financial obligations whose value is derived from an underlying asset. Futures are agreements to buy or sell assets at a later specific price and date. Shorting is borrowing and selling an asset in anticipation of making a profit by buying it back after its price has fallen.

Pimco, a unit of the Munich-based insurer Allianz, managed $1.24 trillion of assets as of December.”

Check out our intensive investment banking, private equity, and sales & trading courses! The discount code Merger34299 will be activated until April 15, 2011. Questions? Feel free to e-mail thomas.r[at]leverageacademy.com with your inquiries or call our corporate line.


Junk Bonds Rebound as Investors Look for Yield

Thursday, March 11th, 2010

Junk bonds have returned over 65% since the fall of Lehman Brothers.  Has credit quality improved since?  Not so much, but investors have become more aggressive and do not wish to earn zero or negative returns after inflation from U.S. Treasuries.  Even corporate bonds are not returning as much, since benchmark rates are so low.  As the Fed’s asset purchases stop in March, this could change.  Mortgage rates have also been kept artificially how.  Low spreads of about 6% on these bonds have helped risky companies refinance.  High yield issuers have already issued $42 billion in the first quarter, a record.

According to Ms. Salas and Mr. Paulden of Bloomberg, high-yield, high-risk bonds are beating investment-grade debt for the first time this year as confidence in the U.S. economic recovery gains strength.

Speculative-grade securities have returned 1.93 percent this month, bringing year-to-date gains to 3.63 percent, according to Bank of America Merrill Lynch index data. That compares with a 0.07 percent loss this month for investment- grade bonds and a 2.32 percent return in 2010. The junk-bond index is being led higher by Freescale Semiconductor Inc. and Energy Future Holdings Corp., formerly known as TXU Corp.

Lenders to the neediest borrowers are accepting the lowest relative yields since January as confidence in the global economy spurs Morgan Stanley to boost its growth estimate for 2010 to 4.4 percent from 4 percent. Speculative-grade credit rating upgrades by Moody’s Investors Service are poised to outpace downgrades for the second consecutive quarter, the first time that’s happened since 2006, according to data compiled by Bloomberg.

“It’s a yield grab,” said Jack Iles, an investment manager at MFC Global Investment Management in Boston who helps oversee $4 billion in fixed-income assets.

The extra yield investors demand to own high-yield bonds instead of Treasuries has narrowed for nine straight days to 6.15 percentage points, the longest streak of spread tightening since August, Bank of America Merrill Lynch data show. The spread had widened to 7.03 percentage points on Feb. 12 from 6.39 percentage points in December on concern that Greece’s budget deficit, Europe’s biggest in terms of gross domestic product, would slow the global economy.

‘Bit of a Stumble’

“Risky assets took a little bit of a stumble from January to mid-February and that was by and large wrapped up with concerns over sovereign debt,” said Christopher Garman, president of Orinda, California-based Garman Research LLC. “Those concerns seem to have more or less faded.”

Elsewhere in credit markets, Fannie Mae sold $6 billion of debt, its biggest offering of benchmark notes since April, as the company boosts borrowing and cuts holdings to fund about $130 billion of planned purchases of delinquent loans from the mortgage securities it guarantees. The 3-year debt from the mortgage company under government control yields 1.803 percent, or 31 basis points more than similar-maturity Treasuries, Washington-based Fannie Mae said in a statement.

Commercial Paper

U.S. commercial paper outstanding rose $11.2 billion to $1.14 trillion in the week ended March 10, after declining by $20.4 billion in the previous period, the Federal Reserve said on its Web site. Commercial paper, which typically matures in 270 days or less, is used to finance everyday activities such as payroll and rent.

Central clearing of derivatives including credit-default swaps will come under scrutiny as part of efforts to safeguard the European Union’s financial system. At a meeting on March 22, EU nations and the European Commission will examine ways to cut the risk in the event that one of the parties to a derivatives contract can’t meet its obligations, according to a document obtained by Bloomberg News.

Clearinghouses for swaps transactions should be open to any firm that wants to process trades in the $300 trillion U.S. market, according to Commodity Futures Trading Commission Chairman Gary Gensler.

“Clearinghouses should not be allowed to discriminate between or amongst the trades coming from one trading venue or another,” the chairman said in prepared remarks at the Futures Industry Association conference in Boca Raton, Florida.

Bondholder Protection

The cost to protect against corporate bond defaults in the U.S. rose as the Markit CDX North America Investment Grade Index, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, climbed 0.5 basis point to a mid-price of 83.5 basis points, according to broker Phoenix Partners Group. The gauge typically increases as investor confidence deteriorates.

In London, the Markit iTraxx Europe index of swaps on 125 companies with investment-grade ratings, rose 1.5 basis point today to 75.75 basis points, the highest since March 5, JPMorgan Chase & Co. prices show.

Credit-default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is 0.01 percentage point and equals $1,000 a year on a contract protecting against default on $10 million of debt for five years.

Signs that the U.S. economy is improving are bolstering demand for speculative-grade securities, according to Martin Fridson, chief executive officer of money manager Fridson Investment Advisors.

‘Healthy Appetite’

“There is a healthy appetite for risk,” Fridson said. “There is a fading of concern over Greece and more upbeat economic numbers.”

Morgan Stanley expects “above-consensus global GDP growth,” raising the projection from December, “despite growth downgrades in Europe,” a weaker first quarter in the U.S. and “recent softening” in a China manufacturing index, the firm’s economists said March 10.

The Organization for Economic Corporation and Development said March 5 its leading indicator, which signals the direction of the economy, reached the highest in almost 31 years in January.

The measure increased by 0.8 point to 103.6 from 102.8 in December, the Paris-based organization said. January’s reading was the highest since May 1979. Gains on the month were led by Japan, the U.S., Canada and Germany, the OECD said.

Spreads to Narrow

High-yield spreads will narrow to 4 percentage points by year-end as defaults plunge, according to Garman. Moody’s predicts the speculative-grade default rate will decline to 2.9 percent by the end of 2010 from 11.6 percent in February. The rate fell from 12.5 percent in January.

The worst-rated bonds are performing the best this month. Securities ranked CCC and lower have gained 2.77 percent while BB rated notes, the highest junk tier, have returned 1.81 percent, Bank of America Merrill Lynch data show. High-yield securities are rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s.

Bonds of Freescale, the computer chipmaker bought by firms led by Blackstone Group LP, have climbed 5.36 percent on average and debt of Energy Future, the power producer taken private by KKR & Co. and TPG, has returned 4.27 percent, Bank of America Merrill Lynch data show. Austin, Texas-based Freescale is rated Caa2 by Moody’s and B- by S&P. Dallas-based Energy Future is rated Caa3 and B-, respectively.

Issuance Rises

The bonds are rallying in part because the thawing of the new issue market has given the riskiest companies the ability to refinance their debt, said MFC Global’s Iles.

Speculative-grade companies have issued $42.5 billion of bonds in 2010, already a record first quarter, Bloomberg data show. Junk bond sales totaled $11.8 billion in the first three months of 2009.

“The reopening of the new issue market was huge for these guys,” Iles said. “The ability for companies like TXU to restructure even part of their balance sheet is much better than it was even six months ago.”

Lisa Singleton, a spokeswoman for Energy Future and Freescale spokesman Robert Hatley declined to comment.

Among high-yield borrowers selling debt this week were GMAC Inc., which sold $1.5 billion of 8 percent, 10-year bonds, and McLean, Virginia-based Alion Science & Technology Corp., which issued $310 million of 12 percent payment-in-kind notes that can pay interest in the form of added debt.

Insurance companies were the best performing industry in the Bank of America Merrill Lynch U.S. High Yield Master II Index with gains of 6.63 percent this month. Bonds of American International Group Inc., once the world’s largest insurer, have risen to the highest levels in 18 months after the New York- based company said March 1 it was selling AIA Group Ltd. to Prudential Plc for $35.5 billion.

Financial service company debt, the second-best performing sector, gained 3.64 percent and restaurant company bonds followed with returns of 3.13 percent, index data show.

Who Issues Bonds?

Wednesday, February 24th, 2010

Who issues Bonds?  To learn, please watch this video:

[youtube]http://www.youtube.com/watch?v=8bKJ6b2oKqo&feature=related[/youtube]

~Saving & Investing