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Strategists Expect Corps. To Cool Down In Second Half

21 Jul 2001

Investment-grade strategists say corporate bonds will not perform nearly as well in the second half of the year as they did in the first. Louise Purdell, corporate strategist at Deutsche Bank Securities, recently changed her corporate recommendation from overweight to neutral, citing problems in Argentina, a continued dim outlook for the U.S. economy and the low likelihood of further significant rate cutting by the Federal Reserve. Deutsche has conducted surveys indicating that most investors are overweight the sector, and Purdell believes there is minimal room for further spread tightening, given the significant risks involved. She cites Lehman Brothers indices to show that from January to June U.S. investment-grade credits had a 5.38% nominal return and 282 basis points of excess return versus Treasuries. For the second half of the year, she expects the excess return to Treasuries to be in the range of 65 to 75 basis points.

Vince Boberski, economist and strategist at Dain Rauscher in Chicago, also expects corporates to cool down, but notes that there are several mitigating factors that make the sector still a solid investment. Corporates still offer strong value relative to agencies and mortgage-backed securities because they provide good raw yield, which, in the current low volatility environment, is the main driver of total return. Also, he expects issuance, which was light in the second quarter, to pick up again in the second half. Finally, he expects that the U.S. Treasury curve will remain fairly steep--a situation which helps all spread products.

21 Jul 2001