Some Asset Managers Moving from Treasuries to Corporate Bonds

Following the recent comments of Yale's endowment investment chief, David Swensen (see previous post), over half of a group of recently surveyed asset managers believe that high-quality corporate credit is currently trading at cheap levels and will likely rally in 2009 (see Financial Times article). Many feel that the rush to the safety of Treasuries has caused all grades of corporates, even high-grade bonds, to be oversold.

On the other hand, many of the same analysts, including Pimco's Mohamed El-Erian, feel that US Treasuries will face considerable pressure after their recent fear-driven price appreciation, which in some cases drove yields to near zero levels for some shorter duration issues. Given the current desire by the incoming Congress and the President-elect to fund numerous public sector and infrastructure projects, the government will be forced to increase its issuance of debt, putting further pressure on Treasury prices.

Comments

[Steve in TN:]

I appreciate the article by Dr. Enke, BUT I think this article is a little tardy. How any successful money/hedge fund manager would still have funds in treasuries is beyond me. Conversely, they would have to be absolutely asleep not to have already purchased a lot of corporate bonds.
I am currently shorting treasuries and have positions in LQD and AGG.

Jan 06 03:17 PM

[mr freddo:]

Shorting Treasuries is getting to be a very popular call. Even I'm doing it and my timing was wrong 90% of the time last year. Oh well, its a new year eh?

I agree with the theory that treasury yields have been depressed because of a rush by the fearful into the world's safest instrument. As the crisis ebbs, it makes sense that we will all venture out again into the world and move our money back to corporate bonds and stocks. Treasury rates will have to rise as corporate rates fall back into a more normal spread.

Is this crisis over? Or have we just reached a temporary lull in the storm that is about to break out again in full fury?

The Markets have been strangely calm. Have the hedge funds exhausted themselves finally in their orgy of forced selling?

Using TBT to short treasuries means that I win if rates go up. That could be due to inflation or due to a recovery taking hold. But as we know, the timing of these things is part of the key to the equation. We could be nowhere near the end of the not just bad news, but increasingly scarier magnitudes of bad news.

Which would mean continued flight to treasuries and low rates. Certainly the Fed will fight to keep rates low for as long as it takes to turn the housing market around.

Jan 06 04:53 PM

[User 265729:]

I know the names of two of those *managers* --

1. Paulson

2. Bernanke

Jan 06 08:15 PM

[Michael Zhuang:]

I want to start a David Swensen fan club. Any suggestion?

www.david-swensen.com

Jan 06 09:23 PM

[{5U}:]

LQD maybe a bit long in the tooth but you can find better value in single name issues

The Morgan Stanley 4.75% 14 are still yielding 9%

In this socialist market, the PFF may make sense It is laden with govie favorites

us.ishares.com/product...

Still yields about 15%

Wells, Citi and USB comprise about 15% of the ETF

Uncle Sam wants credit spreads to tighten


On Jan 06 03:17 PM SteveTN wrote:

> I appreciate the article by Dr. Enke, BUT I think this article is
> a little tardy. How any successful money/hedge fund manager would
> still have funds in treasuries is beyond me. Conversely, they would
> have to be absolutely asleep not to have already purchased a lot
> of corporate bonds.
> I am currently shorting treasuries and have positions in LQD and
> AGG.

Jan 06 10:03 PM

[{5U}:]

Hedge funds are reaching trying to push up performance so they can get above their high water marks from 2008.

They also have been restricting investors from withdrawing money.

This rally is all about long only asset managers and hedge funds chasing performance. The most crowded, highly shorted pieces of krap float up the hardest in this type of tape.


On Jan 06 04:53 PM mrfreddo wrote:

> Shorting Treasuries is getting to be a very popular call. Even I'm
> doing it and my timing was wrong 90% of the time last year. Oh well,
> its a new year eh?
>
> I agree with the theory that treasury yields have been depressed
> because of a rush by the fearful into the world's safest instrument.
> As the crisis ebbs, it makes sense that we will all venture out again
> into the world and move our money back to corporate bonds and stocks.
> Treasury rates will have to rise as corporate rates fall back into
> a more normal spread.
>
> Is this crisis over? Or have we just reached a temporary lull in
> the storm that is about to break out again in full fury?
>
> The Markets have been strangely calm. Have the hedge funds exhausted
> themselves finally in their orgy of forced selling?
>
> Using TBT to short treasuries means that I win if rates go up. That
> could be due to inflation or due to a recovery taking hold. But
> as we know, the timing of these things is part of the key to the
> equation. We could be nowhere near the end of the not just bad news,
> but increasingly scarier magnitudes of bad news.
>
> Which would mean continued flight to treasuries and low rates. Certainly
> the Fed will fight to keep rates low for as long as it takes to turn
> the housing market around.

Jan 06 10:06 PM

[Timmothy Posey:]

It now seems like everybody and their dog is using TBT to short treasuries.

Jan 06 10:56 PM

[Urbane Gori...:]

Mr. Zuang .. How about "The David Swensen fan club" jegan ;-)

Jan 07 05:20 PM

[Stock Marke...:]

There is still baby with the bath water effects being seen with solid companies out there...check balance sheets. Who cares if the stock goes up for down, they cut employees to streamline..just make sure they aren't going under and you will win.

Jan 25 04:42 PM