PIMCO managing director Mark Kiesel on the biggest opportunity he's seeing in this credit market:
We’re seeing the most attractive opportunities in high-quality, senior, investment grade corporate bonds. There are three reasons we think it’s a good time to own select investment grade credits: first, we believe valuations are attractive for selective companies on both an absolute and relative basis. Second, we see opportunities in key areas of the market that should benefit from aggressive policy support. Third, we believe increased global government bond issuance and spending should support selective credit investments as investors allocate out of government bonds and into higher-yielding, high-quality corporate bonds.
The U.S. government – through Treasury, Federal Reserve and FDIC programs – is ‘pedal to the metal’ with fiscal stimulus as well as direct support for certain companies and industries. These types of policy moves are not limited to the U.S. – central banks and governments around the world are aggressively expanding their balance sheets as they buy assets and support the flow of credit to the private sector.
Q: Why is now a good time to buy high-quality credit?
Kiesel: In terms of valuation, investment-grade credit spreads are currently at or near their widest levels in decades, and in some sectors they are approaching the widest since the Great Depression. This asset class has not been so attractively valued in a very long time. Additionally, we think yields at or around 7% to 8% on investment grade corporate debt look particularly compelling because we believe equity returns will be low over the next several years. In addition, Treasury yields are now near historical lows (see chart). Given the current economic environment, we expect corporate profits to grow at roughly the same pace as nominal gross domestic product (GDP), which we expect to remain weak and below trend. And dividends, currently around 3.5%, may get cut, rendering the equity market far less attractive than investment-grade corporate bonds.
This disparity between our expectations for high-quality credit versus equity is interesting, because it implies that an investor can go up in the capital structure by owning senior bonds, and get higher return potential than equity holders are getting at the bottom of the capital structure. Yet, corporate bonds, because of their seniority in the capital structure, generally have significantly less risk (and volatility) than equity holders. The current risk/reward makes high-quality corporate bonds a particularly attractive alternative to stocks.
Read the full interview.