At least three fixed-income portfolio managers and a strategist say investment-grade corporate bonds are almost certain to fall short of their stellar first half performance. Still, all but one remain guardedly upbeat about the sector as they see little chance for spreads to widen. All are focusing on high-beta (high-yield/ low risk) sectors to maximize their return over ever lower-yielding Treasuries.
Investment-grade bonds outperformed Treasuries by 370 basis points through last Thursday. And, Krishna Memani, global credit strategist at Credit Suisse First Boston, is looking for an additional 135 basis points of excess returns through year-end, which would make it the best year in history for the corporate bond market.
While absolute spreads are tight, low interest rates mean that yields for corporate bonds are still attractive when viewed as a percentage of Treasury yields, says Jim Claire, head of taxable fixed-income trading at Evergreen Investment Management Co., which manages $100 billion in fixed income. Claire says Evergreen will especially focus on high-yielding sectors such as autos, media and telecom further out on the yield curve. David Fowley, director of the firm's $2.35 billion strategic fixed-income group, will continue to extend his holdings in cable names such as Comcast Corp. and Cox Communications to take advantage of the steep curve. He says the firm's portfolios have a modest overweight to corporates.
In addition to attractive yields and improving balance sheets, the risk of consolidation is small in the media sector outside of television, accordingJeffrey Ebert, portfolio manager of $17 billion at U.S. Bancorp Asset Management. While Ebert sees weakening fundamentals in the auto sector, he still sees autos as an attractive investment, noting "there really aren't any other opportunities that offer that kind of yield." The Minneapolis firm is 4-5% overweight to corporates versus its index, though it has pared back its allocation since the start of the year. Ebert says US Bancorp will look to add to its corporate position if equity volatility increases after the July 4 holiday and causes spreads to move wider, as has happened in previous years.
Putnam Investments is the most cautious of the group. The $70 billion mutual fund giant has just a neutral position in corporates, and while it is also overweight riskier sectors such as cable, media and telecom, it is underweight the auto sector despite its attractive yields. James Prusko, portfolio manager, says he wants clearer signs that the economy is improving before buying more paper from the Big Three. "They either provide a lot of performance or have a big negative impact." Prusko says he is not comfortable making a bet on an improving economy driving auto spreads tighter, given that his upside as a corporate bond investor is somewhat limited.