Bond losses erased as gross warns of exuberance
Corporate bond returns worldwide have turned positive for the year, recouping January losses as the manager of the world's biggest fixed-income mutual fund warns credit is "somewhat exuberantly and irrationally priced."
Bonds have gained 0.73 percent in February, pushing returns this year to 0.31 percent following a 0.42 percent loss in January, according to the Bank of America Merrill Lynch Global Corporate & High Yield index. Average yields have dropped 11 basis points this month, leaving borrowing costs for the riskiest to the most-creditworthy borrowers within 5.6 basis points of the record-low 3.24 percent reached Dec. 28.
Federal Reserve Chairman Ben S. Bernanke signaled this week that the central bank will keep holding down benchmark rates near zero and purchasing Treasuries and mortgage debt, maintaining unprecedented stimulus that's helped company bonds rally 54 percent since the end of 2008. Fed meeting minutes released last week had showed policy makers debating when to start trimming debt purchases.
"We are years from that," said Noel Hebert, chief investment officer at Bethlehem, Pennsylvania-based Concannon Wealth Management LLC, which oversees about $250 million. "Most of the developed world isn't in a position to tolerate higher rates."
Bond buyers are favoring investment-grade debt over high- yield securities as concern mounts that fiscal cuts in the U.S. may harm the economy and election deadlock in Italy will reignite Europe's debt crisis.
Investment-grade debentures have returned 0.81 percent in February compared with 0.4 percent for speculative grade, rated below Baa3 at Moody's Investors Service and lower than BBB- at Standard & Poor's. In January, investment grade lost 0.76 percent as junk debt returned 1.19 percent.
The gains in corporate debt, which before January last faced a monthly loss in November 2011, prompted Pacific Investment Management Co.'s Bill Gross to caution that the degree of price irrationality is about 6 on a scale of 1 to 10 and rising.
"Spreads are tight, corporate profit margins are at record peaks with room to fall, and the economy is still fragile," Gross, manager of the $286 billion Pimco Total Return Fund, wrote Wednesday in his monthly investment outlook posted on the Newport Beach, California-based company's website.
Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. rose, with the Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness.
The index typically rises as investor confidence deteriorates and falls as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.