A man walks past a Pacific Investment Management Company LLC (PIMCO) advertisment which is displayed on a building in Hong Kong, China (Photographer: Brent Lewin/Bloomberg)

Goldman and Pimco Warm to Battered Corporate Bonds. Well, Some

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(Bloomberg) -- Investors who sold corporate bonds indiscriminately this year are being urged to look again: They may not all be bad.

Goldman Sachs Group Inc. and Pacific Investment Management Co. see safe places, even in corporate bonds, to ride out credit and rate risk that loom large over an aging growth cycle. They both favor lending to higher-quality companies, with Goldman preferring short-dated bonds.

The advice stands out after investors suffered the steepest first-quarter losses on U.S. investment-grade company bonds since 1996, according to Bank of America Merrill Lynch indexes. The selloff that battered company shares also hit their debt, as doubts over economic momentum, leverage, and the pace of Federal Reserve rate increases left many wary of taking on default and duration risk.

With those factors still at play in the market, it pays to be picky.

"Given we are in the second half of the economic expansion, now is the time to move more into investment grade and high-quality sectors,” said Pimco’s CIO of global credit, Mark Kiesel, on Tuesday in a Bloomberg TV interview. He recommended getting more cautious on high yield.

Pimco appears to be striking a different note from November when CIO for global fixed income Andrew Balls said inflated prices for corporate debt were poised for a comedown. “If you’re disciplined when assets are expensive, you’re able to take advantage of cheapness later on,” Balls said at the time.

Investment-grade corporate bonds will outperform government peers as yields rise, with credit spreads narrowing by year-end, according to Goldman Sachs strategists. They like bank bonds and asset-backed securities maturing in between one and three years.

“We think the spread widening in higher-rated product is overdone,” Goldman strategists including Marty Young said in a note Thursday. They favor “high-quality, short-duration and floating-rate” notes that act as a defense against rate risk with the bank forecasting 10-year yields moving toward 3.25 percent by the end of the year from around 2.8 percent.

Still, many remain skeptical on the market’s outlook.

HSBC Securities Inc. analysts including Ed Marrinan downgraded their call on high-grade credit to neutral (they were already neutral on speculative-grade company debt) on Wednesday, citing tighter credit conditions and the “high level of leverage,” particularly at companies with the lowest investment-grade ratings.

Marrinan’s group pushed up their spread forecast for U.S. investment-grade bonds by 22 basis points to 115 basis points over government benchmarks, and downsized their forecast for total return to 1.55 percent this year, versus an earlier estimate of 4 percent.

Those returns are certainly slimmer than the 6.5 percent investors earned in 2017, but they would represent an improvement from the first quarter’s losses.

With the rise in higher-quality corporate bond yields, “you don’t need to take as much credit risk,” said Kiesel at Pimco. “You can actually de-risk, go up the capital structure and own higher-quality companies and still get decent yield.”

©2018 Bloomberg L.P.

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