Global investors pare risky bond holdings, brace for sell-off
By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) - Some of the biggest global investors have started to pull back from riskier fixed-income assets even as the Federal Reserve keeps on a green light for risk.
Loomis Sayles, GAM, and Standish are among those who say U.S. investment grade and high yield corporate bond prices have gone too far, making returns less compelling. They're aiming to get ahead of a market reversal that could be unpleasant once the Fed starts raising interest rates, probably next year.
"Valuations are getting stretched," said Jack Flaherty, investment manager at GAM, part of GAM Holding AG, a publicly-listed Swiss company with more than $120 billion in assets. "You'd rather be early in getting out because when it does turn, it could be more violent than expected."
Bonds had a solid start to 2014, with the Barclays U.S. Aggregate Index returning about 3.8 percent for the first six months of the year. Interest from overseas investors and pensions has kept flows into fixed income funds strong.
That has reduced the extra premium investors are willing to pay to hold these bonds instead of the safer U.S. Treasuries. This premium, or spread, is now at its lowest since 2007, and suggests confidence in the prospects of the U.S. corporation issuing the debt.
GAM has pared its U.S. high-yield bond holdings, and plans to cut back more over the next few months. It's re-allocated to emerging market local debt and convertible bonds -- debt that can be converted into shares of stock.
Flaherty is concerned that after the Fed raises rates, liquidity could be a big problem because of Wall Street brokerages' reduced presence in the corporate bond market.
In the past, big banks could be counted on to make it easier to buy and sell bonds because of their sizable inventory. But new rules have made it more costly to hold such assets. Continued...