Bond funds stock up on Treasuries in prep for market shock

Thu Oct 23, 2014 8:08am EDT
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By Tim McLaughlin

BOSTON (Reuters) - U.S. corporate bond funds this year are adding Treasuries to their holdings at more than twice the rate of corporate debt amid concern that the struggling European economy and potential changes in Federal Reserve policy will drag down profits at U.S. corporations.

Through September, corporate bond portfolios boosted their holdings of U.S. government debt by 15 percent, compared with a 6.5 percent increase in corporate bonds during the same period, according to Lipper Inc data. The funds now hold about $13 billion in Treasuries, 15 percent more than the $11.3 billion they held at the end of 2013.

Corporate bond funds typically invest in a range of debt that includes mortgage-backed securities, U.S. Treasuries and bonds backed by student loans, credit cards and auto loans. Some corporate junk bond funds have guidelines that allow them to buy individual stocks. The move to buy Treasuries, which are more easily traded than most corporate bonds, show that managers anticipate market turmoil that could lead to redemption demands from investors.

Matt Toms, head of fixed income at New York-based Voya Investment Management, said he has cut exposure to corporate bonds in favor of mortgage-backed securities, for example. In particular, he has reduced corporate debt issued by U.S. financial companies because of their exposure to the weak European economy. He sees mortgage-backed bonds as more U.S.-centric because they are backed by the ability of American homeowners to make good on their monthly mortgage payments.

"The volatility in Europe could translate more quickly through the corporate debt issued by U.S. banks," Toms said.

A year ago, the Voya Intermediate Bond Fund's top 10 holdings included debt issued by Morgan Stanley, JPMorgan Chase & Co and Goldman Sachs. But more recently, none of those banks' debt cracked the top 10 holdings of the fund, disclosures show.

Toms, who runs the $1.9 billion Voya Intermediate Bond Fund, said nearly two-thirds of the portfolio's assets are in government bonds or government-related securities.

"That's a highly liquid pool," he said.   Continued...

Traders work on the floor of the New York Stock Exchange March 17, 2014. REUTERS/Brendan McDermid