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Income Comes in Lots of Variety
01/29/2009 10:42 am EST
Kristin Ceva, principal and fund manager at Payden & Rygel, thinks fixed income is still the place to be in 2009.
Q. Kristin, fixed income had a pretty good year in 2007 and did much better than equities year in 2008. What is your outlook for 2009?
A. 2008 saw sharply lower yields across all developed government bond markets in response to the turmoil in the financial sector, despite quite unprecedented responses from governmental authorities around the world.
We expect global growth to remain extremely weak for most of 2009 and probably into 2010. Developed economies will likely contract in real terms for most of this year, and global growth of around only 1.5 to 2% in 2009 will meet the Organization for Economic Cooperation and Development’s (OECD) definition of a global recession. Inflation will fall everywhere.
We see relatively muted global growth through 2010 and global short rates staying very low (close to or at zero) across the major economies throughout 2009 and into 2010. Although the (massively increased) supply of government bonds and eventual inflation risks create the possibility of a major bear market in government bonds at some point, we do not see this for at least the first two or three quarters of 2009, but rather for 2010 or beyond.
We view corporate spreads as being extremely wide, and believe that they represent attractive value (both investment grade and high yield) relative to other asset classes. However, any really significant tightening in yield premiums relative to governments [may have] to wait until later this year or even into 2010 when the growth outlook begins to show some signs of improving. On a three- to five-year view, we believe that investment-grade and high-yield bonds will significantly outperform government bonds, and quite possibly equities, too.
Q. In the past few months, both your Payden Global Fixed Income Fund (PYGFX; 2.7% 2008 return) and Payden Emerging Markets Bond Fund (PYEMX; -10.3% 2008 return) have been pretty focused. Will you be changing your allocation for 2009?
A. [In Global Fixed Income], within Europe, we have been overweight Germany versus the peripheral countries such as Italy, Greece, and Spain which has added to performance as the peripheral spreads have widened due to deterioration in those economies. We are overweight investment-grade corporates in the US and Europe. We also have allocations to high-yield and emerging-market debt. We are currently long the Japanese yen versus the euro.
In Emerging Markets Bond, our biggest weights in 2008 were in Brazil, Mexico, Philippines, Turkey, and Peru. In 2009, we have reduced our external debt overweight to Brazil and Mexico and added to our Philippines and Indonesia position. We have reduced our Russian holdings since the last quarter of 2008 and we continue to be positioned defensively. We added to South African external debt as we find spreads level attractive. We continue to see value in Latin American rates, in particular Brazil and Mexico, where the easing cycle has just begun
Q. Are you a proponent of government-backed debt, and is it an option for individual investors?
A. So far, there's been over $100 billion of issuance in the US of Federal Deposit Insurance Corp. (FDIC)-backed bank debt that is guaranteed full faith and credit by the US government. Yields have been in the 2.5% to 3.5% range with mostly three-year maturities. These are attractive yields relative to Treasuries at 1%.
Much of the investor base for this product is institutional. Individual investors might consider these securities as alternatives to a savings account or a money market fund. FDIC debt hasn't really penetrated the individual retail market yet, however, so it may be difficult to get involved.
We'll likely see a lot more over the next six months both here in the US and in many other developed countries (EU, UK, Australia). Eventually, these securities could end up being as prevalent as agency debt (Freddie Mac and Fannie Mae) and you could end up seeing it become more broadly available through mutual funds or ETFs.
Q. Is 2009 an either-or (equities or bonds) type of market?
A. Equity valuations certainly appear attractive right now. However, given the weakness that we expect in forthcoming economic data and the likely volatility in the equity markets, we prefer to be in other asset classes that offer attractive valuations but more stability, such as investment-grade and high-yield corporate bonds. The high-yield asset class could outperform equities over the next few years; after last year’s sell-off, many bonds in the high-yield universe now have yields of over 14%. We focus on more defensive industry sectors, and on companies in the high-yield market that have good liquidity characteristics.
We also think that emerging-market debt offers a good sovereign diversifier in portfolios to corporate exposure which investors have in their portfolios (in equities and corporate bonds). Emerging-market sovereign spreads have also sold off to attractive levels, and we think that emerging-market governments are much less likely to default in the current environment than emerging-market corporates.
Q: Thank you.
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