June 20, 2010, 7:48 PM EDT
By Shelley Smith
June 21 (Bloomberg) -- The gap between spreads on Asia’s lowest investment-grade bonds and its top high-yield notes widened to the most in a year, signaling junk debt may rally after investors dumped it amid Europe’s fiscal crisis.
The difference between bonds ranked at least Baa3 by Moody’s Investors Service or BBB- by Standard & Poor’s and those one grade lower at Ba1 or BB+ climbed to 2.8 percentage points after rising to as much as 3.15 percentage points last month, Bank of America Merrill Lynch data show. That’s almost five times the 0.61 percentage point gap of June 2009 and 1.1 percentage points above the one-year average.
“If you can take a long-term view the high-yield space looks pretty attractive,” Gregor Carle, Fidelity International Ltd.’s fixed-income investment director, said in an interview in Hong Kong. “Without a doubt there are opportunities to be found in the gap between investment-grade and high-yield.”
Concern about contagion from Greece’s fiscal crisis triggered five weeks of withdrawals from global speculative- grade bond funds through June 9, according to EPFR Global, even as Moody’s forecast corporate defaults will plunge amid a global economic recovery. Investors withdrew $6.37 billion from junk bond funds until the week ending June 16, when money managers won back a net $164 million, according to EPFR, which tracks global capital flows.
Companies with the highest junk ratings are fundamentally the same as they were before Greece roiled markets and so their debt is undervalued, said Carle, who helps oversee $752 million in Fidelity International’s Asian High-Yield Fund.
‘Substantial’ Compensation
“If you’re an investor that can switch freely between investment-grade and high-yield corporates, now is a good time to switch out of lower-rated investment-grade into the higher- rated high-yield,” Viktor Hjort, a Hong Kong-based credit strategist at Morgan Stanley, said in a phone interview. The compensation for the additional risk is “substantial,” he said.
The Asia-Pacific region’s corporate default rate will “drop sharply” to 3.5 percent this year from 17 percent in 2009 as the region’s economies and credit markets strengthen, Moody’s said on June 13.
“The bulk of defaults are behind us already, so in the medium to long run high-yield is an attractive asset class,” Brayan Lai, a credit analyst at Credit Agricole CIB in Hong Kong, said in an interview. “Will the spread between BBB and BB credits narrow again? Yes, it definitely will.”
--Editors: Will McSheehy, Hugh Chow
To contact the reporter on this story: Shelley Smith in Hong Kong at ssmith118@bloomberg.net
To contact the editor responsible for this story: Will McSheehy at wmcsheehy@bloomberg.net
From Bloomberg Businessweek published on June 20, 2010, 7:48 PM EDT
Wall Street pay should be tied to bonds, critic says
Bonuses for Wall Street's top executives should be tied to a basket of the firm's securities, including bonds, to align managers with all stakeholders and discourage excess leverage and risk, suggests one expert.
Bonuses for Wall Street's top executives should be tied to a basket of the firm's securities, including bonds and stocks, to align managers with all stakeholders and discourage excess leverage and risk, Harvard Law School professor Lucian Bebchuk said.
Under stock-based compensation arrangements, executives are "not exposed to the potential negative consequences that large losses could impose on other contributors to the capital structure, like preferred shareholders, bondholders and depositors," Bebchuk said in a conference call with reporters Tuesday.
Wall Street chief executive officers, including Goldman Sachs' Lloyd Blankfein and JPMorgan Chase's Jamie Dimon, continue to receive pay awards that are made up of restricted stock.
Because banks carry more debt than equity, a better compensation system would also link executives' pay to the performance of bonds and preferred stock, Bebchuk said.
"We could tie the payoffs to executives not just to the value of common shares but to the long-term value of a broader basket of securities," Bebchuk said.
"So, for example, instead of giving executives 3 percent of the value of the firm's common shares, you could give them, say, 1 percent of the aggregate value of the common shares, preferred shares and bonds."
Goldman Sachs, which paid Blankfein a $9 million all-stock bonus for 2009, carried about $64 billion in common equity at the end of December compared with $230 billion in preferred stock and short- and long-term unsecured debt, according to a company filing.
JPMorgan, which paid Dimon $17 million of restricted stock units and options for 2009, had $157 billion in common equity compared with $330 billion in preferred stock, long-term debt and other borrowed funds, a company filing showed.
Bebchuk has been a vocal critic of Wall Street pay practices. His "Wages of Failure" paper last year showed that top officials at Lehman Brothers and Bear Stearns cashed in $2.5 billion in the eight years before their firms collapsed in 2008.
He made his remarks Tuesday on a call hosted by the Investor Responsibility Research Center Institute, a New York-based not-for-profit organization that funds environmental, social and corporate governance research.
In March, the European Parliament's top financial lawmaker made a similar recommendation when she advocated paying bankers' bonuses in subordinated debt rather than shares or cash to limit the type of risk-taking that contributed to the financial crisis.
Sharon Bowles, chairwoman of the assembly's Economic and Monetary Affairs Committee, said bonuses would be held for five years in a pool that the bank could use as capital to absorb losses.
Bankers' bonuses should be capped at 50 percent of their pay, lawmakers on the EU committee said Tuesday, as they voted on tougher capital and remuneration rules for banks.
The plan will be voted on by the whole EU Parliament next month.
From The Seattle Times published on Saturday, June 19, 2010 at 10:00 PM
Bonuses for Wall Street's top executives should be tied to a basket of the firm's securities, including bonds and stocks, to align managers with all stakeholders and discourage excess leverage and risk, Harvard Law School professor Lucian Bebchuk said.
Under stock-based compensation arrangements, executives are "not exposed to the potential negative consequences that large losses could impose on other contributors to the capital structure, like preferred shareholders, bondholders and depositors," Bebchuk said in a conference call with reporters Tuesday.
Wall Street chief executive officers, including Goldman Sachs' Lloyd Blankfein and JPMorgan Chase's Jamie Dimon, continue to receive pay awards that are made up of restricted stock.
Because banks carry more debt than equity, a better compensation system would also link executives' pay to the performance of bonds and preferred stock, Bebchuk said.
"We could tie the payoffs to executives not just to the value of common shares but to the long-term value of a broader basket of securities," Bebchuk said.
"So, for example, instead of giving executives 3 percent of the value of the firm's common shares, you could give them, say, 1 percent of the aggregate value of the common shares, preferred shares and bonds."
Goldman Sachs, which paid Blankfein a $9 million all-stock bonus for 2009, carried about $64 billion in common equity at the end of December compared with $230 billion in preferred stock and short- and long-term unsecured debt, according to a company filing.
JPMorgan, which paid Dimon $17 million of restricted stock units and options for 2009, had $157 billion in common equity compared with $330 billion in preferred stock, long-term debt and other borrowed funds, a company filing showed.
Bebchuk has been a vocal critic of Wall Street pay practices. His "Wages of Failure" paper last year showed that top officials at Lehman Brothers and Bear Stearns cashed in $2.5 billion in the eight years before their firms collapsed in 2008.
He made his remarks Tuesday on a call hosted by the Investor Responsibility Research Center Institute, a New York-based not-for-profit organization that funds environmental, social and corporate governance research.
In March, the European Parliament's top financial lawmaker made a similar recommendation when she advocated paying bankers' bonuses in subordinated debt rather than shares or cash to limit the type of risk-taking that contributed to the financial crisis.
Sharon Bowles, chairwoman of the assembly's Economic and Monetary Affairs Committee, said bonuses would be held for five years in a pool that the bank could use as capital to absorb losses.
Bankers' bonuses should be capped at 50 percent of their pay, lawmakers on the EU committee said Tuesday, as they voted on tougher capital and remuneration rules for banks.
The plan will be voted on by the whole EU Parliament next month.
From The Seattle Times published on Saturday, June 19, 2010 at 10:00 PM
Will Bond Funds Come Back to Bite Investors?
By Janet Morrissey Friday, Jun. 18, 2010
A couple meets with their financial advisor.
David P. Hall / Corbis
Investors, spooked by the roller coaster ride in the equity markets, the "flash crash," and sovereign debt problems overseas, are flocking to bond funds for safety and yield. But industry experts say that investors who wrongly think this niche will weather them safely through the economy's ups and downs may be in for a rude — and costly — awakening.
"I have been saying since January that the bond fund area is a big bubble, but that bubble continues to expand and expand and expand," says Marilyn Cohen, author of "Bonds Now!" and president of Envision Capital Management. "I'm extremely worried because when it does pop, I think it's going to have an ugly ending."
Investors burned in the volatile equity markets have been marching into bond funds en masse over much of the past 18 months. In 2009, about $8 billion flowed out of equity mutual funds while a staggering $365 billion moved into bond funds, according to Madeline Schnapp, director of macroeconomic research at TrimTabs Investment Research. So far in 2010, about $6.5 billion has flowed into stock funds while $155.7 billion has moved into bond funds.
At the same time, many investors, frustrated with the low yields offered on money market accounts and CDs, are moving cash into bond funds. "The miniscule payouts on those [short-term] investments have likely pushed income-hungry investors out the yield curve into bond funds," says Sonya Morris, editorial director of Morningstar's Mutual Funds.
But Cohen frets that many of these wide-eyed investors just don't get it. "I think a lot of the money that's gone into bond funds is first-time money — people that were in CDs and money market funds for decades because that's what they understood and that's where they could have safety and security," she says. "If I'm right and a lot of the money that's flooded into bond funds is uneducated and unsophisticated bond money; it's going to be ugly."
What many recent bond-fund investors may not know is that these funds can be buffeted by rising inflation, credit downgrades, and the daily diet of frightening headlines about sovereign default risk, as each of these things can affect the underlying value of bonds held by the fund. As an example, when inflation skyrocketed and interest rates spiked up in the recession of the late 70s and early 80s, many bond investors lost 40% to 50% of the value of their principal. More recently, when the credit market collapsed in 2008, some bond funds were down 30% or 40%. Although most of these funds bounced back in 2009, it's a wild ride that bond fund investors aren't accustomed to.
There's another risk factor that may not make the financial headlines. Supply and demand for bonds can significantly influence prices. The Federal Reserve bought up a trillion dollars of mortgage bonds over the to help support the financial industry; at some point it will look to unload those bonds, which could send interest rates higher. Also, global demand for U.S. Treasury bonds has been high in the wake of the Greek sovereign debt crisis and concerns about the euro, as many considered Treasuries a safe haven. All of this demand has kept yields down. But once foreign investors move out of Treasuries or the auctions don't go well, demand will dry up and yields will rise, which would be "extremely worrisome" for bond holders, says Cohen. The result could be massive redemptions from bond funds, which would exacerbate the selloff in bonds. "The redemption risk is gi-normous — huge!," says Cohen.
From TIMES published on June 18, 2010
Subscribe to:
Posts (Atom)