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The case for global credit in delayed Fed liftoff
Mark Kiesel
A global focus on credit in the hunt for yield has become a little more confusing with the delay this month of the expected increase in US official interest rates. But credit is looking attractive, according to PIMCO.
The world’s largest fixed interest manager has outlined, in a short paper for clients last week, the case for developed markets credit. It’s mainly to do with the US. PIMCO says there are three main themes in action:
> The economic expansion will likely keep defaults low. The economic expansion should continue to support a low default environment for the credit markets outside of higher risk credits in energy and commodity-related sectors.
> Higher interest rates should tighten credit spreads. A higher interest rate environment over the next year should cause a decline in new corporate bond issuance while demand for credit-related assets from investors will likely increase due to higher yields.
> Credit spreads are attractive at today’s valuations. Current valuations are “pricing in” a pickup in defaults, and investors should consider taking advantage of attractive valuations to add select credit risk.
According to Mark Kiesel, a PIMCO managing director, the CIO of global credit and global head of corporate bonds: “Companies have been issuing corporate debt aggressively to get ahead of an anticipated Fed ‘liftoff’, forcing debt markets to digest what is on pace to be a record US$1.15 trillion in new investment grade corporate bonds this year, an increase of 15 per cent from last year.
“While heavy new issuance has caused credit spreads to widen, equities have also come under pressure due to a slowdown in corporate profit growth as well as the heightened market volatility and uncertainty surrounding global growth and Fed lift off. Despite these concerns, the outlook for developed credit markets, and in particular the US credit market, remains constructive.”
Kiesel says that, at current valuations, PIMCO views the credit market as attractive, given the firm’s outlook for supportive economic growth and low defaults.
“We find numerous opportunities today in US housing and housing-related industries, consumer, telecom and healthcare sectors, and in banks and financials,” he says. “Any credit spread widening or market volatility that occurs around anticipated Fed rate hikes should provide attractive entry points for investors in the credit markets.”
