The U.S. leveraged loan market is beginning to look undervalued according to Barclays PLC. The biggest investor flight from the high-yield, high-risk debt since 2008 is creating distortions which are hard to ignore.
Investors have reduced bets that interest rates are set to rise by pulling money from mutual funds that buy the debt. Making the floating-rate debt look relatively cheap to the smaller market in Europe where there are no loan mutual funds to drive prices up or down, according to Brad Rogoff, the New York-based head of global credit strategy at Barclays.
“Our recommendation is to swap from European into U.S. loans,” Rogoff, whose firm is the fifth-largest underwriter of U.S. leveraged loans sold to institutional investors, told Bloomberg in a telephone interview.
The U.S. loan market is underperforming even with nation’s economy forecast to grow twice as fast as the euro area’s.
The acceleration last month in U.S. loan fund outflows pushed a measure of volatility for loan prices to multi-year highs, while Europe has remained “relatively calm,” according to Barclays.
The credit strategists at Barclays report that the spread on single-B rated U.S. leveraged loans would need to tighten about 0.5 percentage point relative to Europe to “restore the relationship that prevailed before the outflows began.”
Todays Other Top Stories
Learn Bonds: – Rauner inherits Illinois downgraded by bond market. – To correct the finances of the lowest-rated US state, Illinois Governor-elect Bruce Rauner won a mandate. Investors agree that the newly elected Republican Governor has a tremendous amount of work to do in order to prevent a credit downgrade closer to junk.
Bernardi Securities: – Detroit and Stockton emerge from Chapter 9 – A few facts, observations and takeaways. – Both Stockton and Detroit emerged from bankruptcy last week. In both cases, judges ruled that each plan as presented is fair and feasible to all parties involved. There are clear winners and losers as a result of these decisions. And much remains unresolved with many unanswered questions. We take a closer look at each decision and what it means for bondholders.
FT: – Muni revival built on shaky foundations. – Few asset classes have enjoyed such smooth sailing throughout this year’s bouts of global market volatility as U.S. municipal debt.
Bloomberg: – Rauner inherits Illinois downgraded by bond market: Muni credit. – Illinois Governor-elect Bruce Rauner won a mandate to fix the finances of the lowest-rated U.S. state. Investors are signaling the Republican’s got his work cut out for him to avert a credit downgrade closer to junk.
All Star Charts: – Why Economists will get bonds wrong again, – One of the things that has consistently brought a smile to my face throughout 2014 is how wrong Wall Street economists have been on interest rates this entire year. Next year I believe economists will get it wrong again. Rates will stay lower for longer. The best way to express that, in my opinion, is to stay overweight higher dividend paying stocks and continue to buy any weakness in US Treasury Bonds, particularly on a relative basis to other countries’ debt.
Bloomberg: – Pimco cuts government-related debt in total return fund. – Pacific Investment Management Co. decreased holdings of Treasuries and U.S. government-related debt in its flagship fund during October, the first month after co-founder Bill Gross left, to the lowest level in a year.
Bloomberg: – Treasury yield gap narrows before $16 billion 30-year auction. – The gap between U.S. three- and 30-year yields approached the narrowest level since 2009, reflecting demand for longer-maturity debt before a bond auction today.
Bloomberg: – Treasury auction demand at 15-month low on Fed concern. – Demand for the U.S. Treasury’s sale of $24 billion in 10-year notes matched a 15-month low, with investors anticipating Federal Reserve interest-rate increases next year.
WSJ: – U.S. Government bonds higher after jobless claims. – Treasury bonds edged higher Thursday after a disappointing labor market report, but a looming 30-year bond sale kept the price strength in check.
MSN: – Corporate bond buying: A ‘good opportunity’? – Louis Gargour, chief investment officer at LNG Capital, discusses whether the time is right to buy corporate bonds.
ETF Trends: – New corporate bond ETF makes the middle look good. – After hauling in $17.7 billion in October, a monthly record, fixed income exchange traded funds are spending plenty of time in the limelight.
High Yield Bonds
Bloomberg: – Junk bond rebound? Wall Street titans at odds over answer. – The woes in the junk-bond market are getting opposing interpretations from Goldman Sachs (GS) Group Inc. and AllianceBernstein LP.
Money Observer: – Investors should ‘snap up’ high-yield bonds. – A dramatic recent fall in the price of high-yield bonds presents a buying opportunity, says Legg Mason affiliate Western Asset.
IFR: – Five issuers raise US$2.69bn in U.S. high-yield. – Borrowers rushed to the high-yield bond market Wednesday, as issuers move to refinance debt in the few weeks remaining before year’s end.
New Model Advisor: – Is the high yield re-entry point upon us? – High yield bonds have started to display value following the recent correction, and now could be a good time to think about initiating a position in the asset class again, according to Thomas Higgins, chief economist and global macro strategist at Standish.
Citywire Global: – Investors ‘too bearish for too long’ on duration, says EM credit chief. – The market fixation with maintaining a short duration stance in advance of rising rates has gone on too long and investors have become too rigid in their outlook.
Morningstar: – 3 Top rated global bond funds. – Looking for income from emerging market bonds – but don’t want to have to keep adjusting your exposure? Choose a global bond fund and leave the weighting to the professionals.
Fundweb: – Catastrophe bond issues shooting for record $9bn this year. – An insurance shortfall is driving large gains in the catastrophe bond market which is on track for a record $9bn of issuance this year, GAM Star Cat Bond manager John Seo says.
The Actuary: – Cat bonds shift to capital markets and prepare for record year. – Market and regulatory stresses are causing catastrophe insurers to partner with capital markets to finance risks such as earthquakes and hurricanes, according to asset management firm GAM.
TheStreet: – European bonds offer opportunities says Babson fund manager Freno. – While the U.S. stock market continues to make new all-time highs, there are other opportunities around the world and in different assets. According to Michael Freno, investors should open their eyes to the world of corporate bonds.
ETF Trends: – Bond ETFs for income generation while hedging rate risks. – After a three-decade rally in the fixed-income market, bond investors will likely have to contend with a rising rate environment ahead. Nevertheless, people can utilize exchange traded funds that leverage institutional approaches to manage their risk exposure.
Financial Advisor: – Legg Mason attracts most money in seven years into bonds. – Legg Mason Inc. attracted $5.1 billion into its bond funds in October, the most in more than seven years, after the departure of Bill Gross from Pacific Investment Management Co. prompted investors to reallocate billions of dollars.
Reuters: – Retail REITs looking pricey as Sears ponders joining mix. – Sears Holding Corp made a huge splash last week when it said it might spin off hundreds of its stores as a real estate investment trust. But the struggling retailer’s move to tap into a surging commercial property market comes as the sector looks increasingly rich.
ETF Trends: – Short-term bond ETFs: Cool kids at the fixed income party. – Although U.S. stocks are soaring to record highs, fixed income exchange traded funds are the apples of investors’ eyes.
The Motley Fool: – Will PIMCO survive Bill Gross’ departure? – Less than two months ago, mutual fund giant PIMCO suffered a huge loss, as Bill Gross decided to leave the company and work for Janus Capital Group instead. The impact of the move was immediate and dramatic, with many investors in Gross’ former flagship PIMCO Total Return Fund withdrawing tens of billions of dollars in assets. But the longer-term effects of Gross’ departure are just now starting to trickle in, and the chain reaction has some wondering whether PIMCO will ever be the same.
2014 YTD Bond Auction avg’s: Primary Dealer’s 37.7% Direct Bidder’s 16.9% Indirect Bidders 45.4% Avg last 4 auctions Allotted at High 94.1%
— InterestArb (@InterestArb) November 13, 2014
Alibaba is heading for the bond markets. Hires MS, Citi, Deutsche and JPM for roadshows from Nov. 17. Potential USD bond to follow.
— Richard Barley (@RichardBarley1) November 13, 2014
30-yr Treasury auction demand weak but 30-yr yield still battling at 3.08% support level.
— AnthonyValeri (@Anthony_Valeri) November 13, 2014
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