Shorter-term treasuries
Lord Abbett & Co---Brown, Zane---Fixed Income Strategist
>> bringing you up to date on headlines crossing the wire. carl icahn, it has been discovered through s.e.c. filings, he has taken a stake of almost 7% of imclone, now the owner of 5.24 million shares. imclone last week won f.d.a. approval, or last month, i should say, for the erbitux drug treating colon cancer. here are the day’s other top headlines. the supermarket battle in california is heating up. wal-mart opened its first grocery-selling store there today, first of 40 so-called super centers that wal-mart plans to open in california over the next four years. wal-mart has lured shoppers from supermarkets by adding low-priced m.c.i.―milk, meat and fruit to shelves. and phillip watts resigning from royal dutch. jeroen vander veer will take over. because of the cut in reserves, the securities and exchange commission is investigating the company and standard and abortion may lower―standard & poor’s may lower the credit lating. the latest survey by the institute for supply management found that the pace slowed. the reading was above 50, signaling expansion. and the fed’s regional survey, or the beige book, shows the economy expanded in january and february. the report said employment grew moderately. the beige book notes slowly-rising retail prices but says commodity prices and the cost of healthcare benefits moved up noticeably. fed policymakers will use the survey when they meet march 16 to set rates. rates will be of great interest to our next guest, as they are to anyone. he’s bullish on high-yield bonds and expects they could deliver 8% to 10% returns this year. he is least bullish, i should say, on treasuries, especially short-term treasuries. zane brown, director of fixed income strategy at lord abbett joins us from jersey city, new jersey. zane, talk to me about why you are so bullish on high yield and not so bullish on the shorter-term treasuries?
>> i think for first of all high yield is more economically sensitive than it is interest rate sensitive. we, among others, look for a pretty robust economy. if we look at a bloomberg graph talking about g.d.p., we see we are already back to year-over-year growth levels that characterized the 1990’s, making a great market for stocks this year and likely to produce a very attractive environment for lower quality credits that are improving as a result of g.d.p. growth. i think that’s why we’re looking forward to better performance out of an asset class, high yield, that starts with an 8% coupon and might add more on top of that in terms of price improvement.
>> why is the g.d.p. deflateer worth looking at in your estimation, if you could explain that to investors.
>> it’s one of greenspan’s favorite measures or indicators of the level of inflation. if we look at the bloomberg graph on the g.d.p. deflater, it suggests we are at very low levels. we would further suggest it’s unlikely to tilt up any time soon. if we’re growing at 4.5% g.d.p., which is very robust growth, but our potential growth is 3.5, it means we’re not using up excess capacity. and it’s only after we use up excess capacity that we start to create the frictions that lead to inflation. so we’re likely to grow at 4.5% all year long and still not create much in the way of inflation. why is inflation important? that’s what drives interest rates. with low inflation, interest rates, even a year from now, are not likely to be substantially higher.
>> another big headliner today, senator john edwards conceded defeat, john kerry all but a shoo in now for the democratic nomination. why would a democrat, if kerry is successful in his bid for the white house, why would investors want to look at bonds under that scenario?
>> with a democratic administration and depending on what happens to congress, democratic party is forced to run on a policy of fiscal restraint. one thing they can point to that bush has done is gone from budget surplus to deficit and in the process of addressing that deficit more aggressively, the democratic party will tax more companies and individuals and spend less, pulling stimulus away from the economy and could push us into another economic slowdown. it would be nice to have bond insurance in somebody’s portfolio were that scenario to unfold.
>> zane brown, director of fixed income strategy at lord abbett, thank you. warm weather and tax refunds brought out shoppers last month. we have a preview of how strong february retail sales are likely to be coming up next.
