Bloomberg: Pimco Says Avoid ‘Black Holes’ in the High-Yield Bond Markets
Sept. 1 (Bloomberg) — Pacific Investment Management Co., the world’s biggest manager of bond funds, said investors should avoid “black holes” of the junk bond market as recovery rates drop.
“We’re somewhat more cautious about high-yield bonds,” Curtis Mewbourne, a managing director at Pimco, wrote in an article on the firm’s Web site. “Careful attention to credit selection and avoidance of so-called ‘black holes of credit’ will likely be a critical component to a successful investment strategy.”
Default rates may rise, while recovery rates for defaulted debt have fallen below 20 percent from about 40 percent, Mewbourne said, citing Moody’s Investors Service data.
Corporate bonds have rallied this year as markets rebounded from the financial crisis sparked by the collapse of the U.S. housing market in 2007 and Lehman Brothers Holdings Inc. last year. Pimco judges business and economic conditions are worse than in the third quarter of 2008, while credit spreads have returned to pre-Lehman levels, Mewbourne said.
Bonds have returned investors 13 percent this year, according to Merrill Lynch & Co.’s Global Broad Market Corporate Index.
“We don’t think a large allocation to high yield makes sense right now given our expectations that default rates will continue to rise and recovery rates will remain lower for unsecured bondholders,” he said. “However, there are select opportunities.”
Mewbourne said Pimco is finding “compelling value” in some parts of the investment-grade corporate bond market.
The company likes high-grade bank and utilities bonds, and some energy bonds. It also favors some high-yield metal and mining companies that will benefit from emerging-market demand for commodities, he said.
High-yield, or junk, bonds are rated below BBB- at Standard & Poor’s and Baa3 at Moody’s.
Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.
