Corporate bonds from the beleaguered industrial manufacturing sector are being pitched as good total return plays by investment-grade players, who argue that the recent spread pullbacks are overdone, given the income stream diversification in several of these names.
Mark Freeman, portfolio manager at Westwood Management in Dallas, Texas, says he is looking closely at names such as United Technologies (A2/A+) and General Motors. Dom Fumai, an analyst at BNP Paribas, says GM spreads are near historically wide levels. Spreads on United Technologies' 6.35% notes of '11 widened some 40 basis points last month after the company lowered earnings guidance in response to weakness in the commercial airline industry. But Freeman notes that the company is well-diversified, as it is a manufacturer of elevator parts and other high-tech equipment, including defense.
He says he would probably add to 10-year paper to take advantage of the steep Treasury yield curve, but would like to gain a stronger sense that the economy, particularly consumer spending, has hit bottom before adding such a name. Fumai recommends buying United Technologies on weakness, but does not believe spreads have widened far enough. In addition to GM, he urges investors to consider names such as Delphi Automotive Systems (Baa2/BBB), which rely heavily on GM for business. Delphi's 6.5% notes of '09 traded at 195 basis points over 10-year Treasuries last week, and Fumai believes they have 20-30 basis points of potential upside over the next two months.