Bonds
PIMCO---Kiesel, Mark---Portfolio Manager
>>> breaking headlines in relation to citigroup. the company says its travelers insurance unit received a subpoena from the new york attorney general’s office in relation to market timing and late trading. they say that the s.e.c. saw additional information this month and it received an information request from the s.e.c. travelers insurance is cooperating fully with all the reviews but the headline is that the insurance unit received a subpoena from the new york attorney general and information request from the s.e.c. moving on, here, now, federal reserve officials are growing nervous about the economy and its inability to generate jobs. richmond fed bank president says slack increase in the labor markets is one area of concern along with little inflationary pressure. that should enable the central bank to keep interest rates near 46-year lows and he says that disinflation is more of a risk than inflation despite the recent increases in the cost of energy. he points to declines in unit labor costs and slow growth in wages. michael moskow, president of reserve bank in chicago, says concerns about inflation are premature and the fed can continue to remain patient. moskow and broaddus are non-voting members of the federal open market committee. our next guest is bearish on corporate bonds and bullish on emerging markets , european government debt and municipal bonds. mark kiesel, portfolio manager with pimco joins us from newport beach, california. thanks for joining us, mark. we’ve seen the spread start to narrow or the amount of yield between the benchmark, say, 10-year treasury and high yields, while we see those spreads between the yields slow down, what will start it narrowing once again in your opinion?
>> our view is actually the spreads will widen. in order for spreads to narrow, you’d need the economy to come through strongly and significant job growth. our view actually is that spreads will widen. we think that valuations are too tight right now. given fundamentals and we think that basically earnings have peaked and are trending down, i negative sign for corporate bond investors right now.
>> clearly, the corporate bond market has had an unbelievable runup. i put together a chart here, the bear stearns global sovereign index, the white line. the orange line here is the global corporate index. both have had a heck of a run since june/july of 2002, really at near-term highs if not all-time highs. do you think these indexes have more to go?
>> i don’t. i think basically what we’ve seen is the embrace of risk appetite and volatility collapse. but now we’re at a point where the valuations are extremely tight. we’re at levels that we’ve seen back in the mid 1990’s. yet corporate leverage is still very high. the companies haven’t delevered to the degree that you’d expect from the valuations. i think the market ‘s vulnerable, vulnerable to stocks and weaker dollar. and that’s particularly important because foreigners at the margin have been the buyer of last resort for corporate credit risk and i think their interest will wane, causing the market to potentially be vulnerable over the second half.
>> probably about a month or so ago indonesia issued a billion dollar bond, the biggest deal it had been in over five years but it was hugely oversubscribed and at a yield unprecedented, something not seen in a decade. what is that telling us about demand for emerging market debt?
>> overall it tells you that the fed is sitting there at 1% fed funds, encouraging investors to take risks. for the most part, that’s worked but now we’re at a point where investors have to step back and look at the price they’re paying for risk assets. i think the markets are forward-looking and the stock market has it right in terms of you’ve seen cyclicals pull back and emerging markets , high yield assets pull back. the trade for the next three months, i think, will be up in quality and that’s the trade we recommend for our clients today.
>> if you were to pick an actual emerging market that’s a broad brush, what part of the world in terms of emerging debt looks attractive to you?
>> we like russia and mexico and the thesis there is they’re very much linked to commodity prices and higher oil prices. emerging markets have de-linked as they’re more attached to china today, the second engine of growth, if you will. that’s a boom for commodity prices and these emerging markets countries have taken the higher growth from china and this higher commodity prices to trim out their debt and built up significant foreign exchange reserves and credit fundamentals are improving so over the next three mongst, we think emerging markets will continue to be a strong performer.
>> thank you very much, mark kiesel, appreciate it, mort manager at pimco. mutual funds are celebrating an 80th birthday as changes sweep the industry. we’ll take a closer look at mutual funds up next.
