Pimco’s Kiesel Says Corporate Bondholders ‘Wake Up’ to Risks

Pimco’s Kiesel Says Corporate Bondholders ‘Wake Up’ to Risks

Investors are “finally” acknowledging the risks of holding corporate bonds with yields hovering at about record lows as the Federal Reserve holds benchmark interest rates at close to zero for a fifth year, according to Pacific Investment Management Co.

“Bondholders are finally starting to wake up to the fact that easy monetary policy for an extended period can also have adverse consequences,” Mark Kiesel, global head of corporate bond portfolios at the manager of the world’s biggest bond fund, wrote today on the firm’s website. “This trend has helped reignite shareholder activism and corporate animal spirits.”

The central bank has held its target rate at between zero and 0.25 percent since December 2008, sending corporate bond yields to a record low of 3.52 percent on Jan. 23, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Index. Companies issued the most debt on record last year at $3.96 trillion, according to data compiled by Bloomberg.

Pimco has been “cautious” in industries that may add debt or that are paying out cash to shareholders, such as technology, retail and pharmaceuticals, Kiesel wrote. The Newport Beach, California-based bond fund manager is also avoiding companies in the defense, gold mining and supermarket segments, given their weak outlook.

‘Irrational Exuberance’

Bill Gross, co-chief investment officer at Pimco, warned investors last month that credit was “somewhat exuberantly and irrationally priced.” Former Fed Chairman Alan Greenspan coined the phrase “irrational exuberance” in a December 1996 speech, in which he asked, “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?”

Pimco is favoring companies that have “solid” revenue growth, such as those related to U.S. housing, pipelines and gaming. Low mortgage rates and a limited housing inventory are pushing up demand for properties, leading to higher prices. Pipelines have benefited from increases to natural gas production and the rise in disposable income in Asia is helping fuel growth in gaming, Kiesel wrote. The company has recommended those sectors since at least August.

To contact the reporter on this story: Matt Robinson in New York at mrobinson55@bloomberg.net

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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