Pimco Wins, Procter & Gamble Loses as Turmoil Spreads (Update1)
By Caroline Salas
http://www.bloomberg.com/apps/news?pid=20601109&sid=aA3.lujabUSM&refer=home
March 6 (Bloomberg) -- Pacific Investment Management Co.'s Total Return Fund, the world's biggest bond fund, has cost investors as much as $55 million because of its growing bet against corporate securities in the past year.
Now, Pimco and Mark Kiesel, who oversees $80 billion of company debt at the Newport, Beach, California-based firm, are gaining some redemption as investors flee all but the safest of assets amid concern rising mortgage delinquencies will slow the economy. The extra yield over Treasuries that investors demand to compensate for the risk of default rose the most in a year last week, according to data compiled by Merrill Lynch & Co.
``It's batten down the hatches time,'' said Kiesel, who was so sure the housing market would collapse that he sold his Southern California home last May and moved to an apartment. ``Pimco has obviously been a little bit off on its timing, but we remain pretty convinced we're going to get this right. Profits have been supported by consumer spending thanks to housing going up. As job creation slows, you're going to see credit risk start to be re-priced.''
The $100 billion Total Return Fund began 2006 with 4 percent of its assets in investment-grade corporate bonds, compared with about 23 percent for its benchmark, the Lehman Aggregate Bond Index. The Pimco fund underperformed Lehman's U.S. Credit Index by 0.29 percentage point in 2006. Pimco's fund had 1 percent of its assets in corporate debt as of the end of January.
Yield Premiums
Bad real estate loans may cause risk premiums to rise from near-record lows, just as they did when hedge fund Long-Term Capital Management blew up in 1998, Enron Corp. and WorldCom Inc. filed for bankruptcy in 2001 and 2002, and General Motors Corp. and Ford Motor Co. were cut to below investment grade in May 2005, said Kiesel.
The extra yield investors demand to own high-yield, high- risk, or junk, bonds rather than risk-free Treasuries shot up 21 basis points on Feb. 27 to 279 basis points, its worst day since May 10, 2004, Merrill Lynch data show.
A week earlier the spread came within 5 basis points of its all-time low of 244 basis points, or 2.44 percentage points, in 1997. It ended yesterday at 299 basis points. Junk bonds are rated below Baa3 by Moody's Investors Service and BBB- by S&P.
Few markets were left unscathed. European corporate bonds, emerging-market debt, mortgage securities, credit derivatives and bonds backed by everything from car loans to credit cards fell. Yields on developing nations' bonds average 190 basis points more than Treasuries, up from 164 basis points less than two weeks ago, according to JPMorgan Chase & Co.'s EMBI Plus index.
No More `Goldilocks'
``It didn't take much for the market to reprice,'' said Scott Kirby, a bond fund manager at Minneapolis-based RiverSource Investments LLC, which manages about $20 billion in commercial and home mortgages. ``People are getting quite worked up.''
Procter & Gamble Co., the largest U.S. consumer-products maker, postponed the euro portion of a $4 billion bond sale because of the disruption. Companies sold $14.8 billion of debt in the U.S. last week, down from $25.2 billion the prior week.
``Based on the unstable markets, we decided to withdraw,'' said Doug Shelton, a spokesman for the Cincinnati-based maker of Folgers coffee and Crest toothpaste.
Firms from Boston-based Putnam Investments to Fifth Third Asset Management in Grand Rapids, Michigan, are paring corporate bonds or shifting into higher-rated securities that may provide insulation from a slumping economy.
Bank of America Corp., the third-biggest manager of bond sales in the U.S., is telling clients to unload corporate bonds because of concern that ``housing-led weakness'' may spread. A month ago, the firm, citing what it called a ``Goldilocks'' economy, recommended buying company debt.
`A Shot'
``This is clearly a little bit of a shot across the bow to credit investors,'' said Paul Scanlon, team leader for U.S. high- yield at Putnam in Boston.
Putnam, which manages $65 billion in fixed-income assets, has been selling its lowest-rated junk bonds in the past month, hedging against losses by using credit derivatives, increasing its cash holdings and buying bank debt, Scanlon said.
Investors are focused on so-called subprime mortgages, loans for houses that are made to people with poor or limited credit records. They made up about a fifth of all new mortgages in 2006, according to the Washington-based Mortgage Bankers Association, an industry trade group.
About 2 percent of subprime mortgages made last year were more than 60 days late after five months, almost twice the rate for ones made in 2005, and the worst in at least seven years, according to a Feb. 22 report from Barclays Capital.
Subprime `Spillover'
``The spillover from the subprime market is only going to continue,'' said Kiesel, who predicts the housing market's deterioration will prompt consumers to curb spending, the economy to slow and the Federal Reserve to cut interest rates.
Kiesel's prediction may already be coming true. The share of mortgages on which payments were at least 30 days overdue rose to 2.11 percent last quarter, the highest since 2002, from 1.72 percent the previous three months, the Fed said Feb. 27. The data aren't adjusted for seasonal patterns.
Pimco has been ``underweight'' investment-grade corporate bonds since at least October 2005, meaning it owns a smaller percentage of the debt than contained in its benchmark indexes.
-Continued Next Page-
By Caroline Salas
http://www.bloomberg.com/apps/news?pid=20601109&sid=aA3.lujabUSM&refer=home
March 6 (Bloomberg) -- Pacific Investment Management Co.'s Total Return Fund, the world's biggest bond fund, has cost investors as much as $55 million because of its growing bet against corporate securities in the past year.
Now, Pimco and Mark Kiesel, who oversees $80 billion of company debt at the Newport, Beach, California-based firm, are gaining some redemption as investors flee all but the safest of assets amid concern rising mortgage delinquencies will slow the economy. The extra yield over Treasuries that investors demand to compensate for the risk of default rose the most in a year last week, according to data compiled by Merrill Lynch & Co.
``It's batten down the hatches time,'' said Kiesel, who was so sure the housing market would collapse that he sold his Southern California home last May and moved to an apartment. ``Pimco has obviously been a little bit off on its timing, but we remain pretty convinced we're going to get this right. Profits have been supported by consumer spending thanks to housing going up. As job creation slows, you're going to see credit risk start to be re-priced.''
The $100 billion Total Return Fund began 2006 with 4 percent of its assets in investment-grade corporate bonds, compared with about 23 percent for its benchmark, the Lehman Aggregate Bond Index. The Pimco fund underperformed Lehman's U.S. Credit Index by 0.29 percentage point in 2006. Pimco's fund had 1 percent of its assets in corporate debt as of the end of January.
Yield Premiums
Bad real estate loans may cause risk premiums to rise from near-record lows, just as they did when hedge fund Long-Term Capital Management blew up in 1998, Enron Corp. and WorldCom Inc. filed for bankruptcy in 2001 and 2002, and General Motors Corp. and Ford Motor Co. were cut to below investment grade in May 2005, said Kiesel.
The extra yield investors demand to own high-yield, high- risk, or junk, bonds rather than risk-free Treasuries shot up 21 basis points on Feb. 27 to 279 basis points, its worst day since May 10, 2004, Merrill Lynch data show.
A week earlier the spread came within 5 basis points of its all-time low of 244 basis points, or 2.44 percentage points, in 1997. It ended yesterday at 299 basis points. Junk bonds are rated below Baa3 by Moody's Investors Service and BBB- by S&P.
Few markets were left unscathed. European corporate bonds, emerging-market debt, mortgage securities, credit derivatives and bonds backed by everything from car loans to credit cards fell. Yields on developing nations' bonds average 190 basis points more than Treasuries, up from 164 basis points less than two weeks ago, according to JPMorgan Chase & Co.'s EMBI Plus index.
No More `Goldilocks'
``It didn't take much for the market to reprice,'' said Scott Kirby, a bond fund manager at Minneapolis-based RiverSource Investments LLC, which manages about $20 billion in commercial and home mortgages. ``People are getting quite worked up.''
Procter & Gamble Co., the largest U.S. consumer-products maker, postponed the euro portion of a $4 billion bond sale because of the disruption. Companies sold $14.8 billion of debt in the U.S. last week, down from $25.2 billion the prior week.
``Based on the unstable markets, we decided to withdraw,'' said Doug Shelton, a spokesman for the Cincinnati-based maker of Folgers coffee and Crest toothpaste.
Firms from Boston-based Putnam Investments to Fifth Third Asset Management in Grand Rapids, Michigan, are paring corporate bonds or shifting into higher-rated securities that may provide insulation from a slumping economy.
Bank of America Corp., the third-biggest manager of bond sales in the U.S., is telling clients to unload corporate bonds because of concern that ``housing-led weakness'' may spread. A month ago, the firm, citing what it called a ``Goldilocks'' economy, recommended buying company debt.
`A Shot'
``This is clearly a little bit of a shot across the bow to credit investors,'' said Paul Scanlon, team leader for U.S. high- yield at Putnam in Boston.
Putnam, which manages $65 billion in fixed-income assets, has been selling its lowest-rated junk bonds in the past month, hedging against losses by using credit derivatives, increasing its cash holdings and buying bank debt, Scanlon said.
Investors are focused on so-called subprime mortgages, loans for houses that are made to people with poor or limited credit records. They made up about a fifth of all new mortgages in 2006, according to the Washington-based Mortgage Bankers Association, an industry trade group.
About 2 percent of subprime mortgages made last year were more than 60 days late after five months, almost twice the rate for ones made in 2005, and the worst in at least seven years, according to a Feb. 22 report from Barclays Capital.
Subprime `Spillover'
``The spillover from the subprime market is only going to continue,'' said Kiesel, who predicts the housing market's deterioration will prompt consumers to curb spending, the economy to slow and the Federal Reserve to cut interest rates.
Kiesel's prediction may already be coming true. The share of mortgages on which payments were at least 30 days overdue rose to 2.11 percent last quarter, the highest since 2002, from 1.72 percent the previous three months, the Fed said Feb. 27. The data aren't adjusted for seasonal patterns.
Pimco has been ``underweight'' investment-grade corporate bonds since at least October 2005, meaning it owns a smaller percentage of the debt than contained in its benchmark indexes.
-Continued Next Page-