NEW YORK, April 13 (Reuters) - Bond fund management company Pacific Investment Management Co. is recommending senior, investment grade corporate bonds in select companies and in banks supported by the U.S. government, the company said on Monday.
"We're seeing the most attractive opportunities in high-quality, senior, investment grade corporate bonds," said Mark Kiesel, managing director and global head of the corporate bond portfolio management group with Pimco, in a U.S. Credit Perspectives interview on the company's website.
Yields of about 7 or 8 percent for U.S. investment-grade corporate debt "look particularly compelling because we believe equity returns will be low over the next several years," Kiesel said. Treasury yields, by comparison, are unattractive because they are still near historical lows, he added. On Monday, the benchmark 10-year Treasury note yielded 2.86 percent, above its five-decade low of 2.04 percent hit in December.
"An investor can go up in the capital structure by owning senior bonds, and get higher return potential than equity holders are getting at the bottom of the capital structure," Kiesel said.
Within investment grade corporate bonds, Pimco is investing in sectors such as pipelines, utilities and health care and in sectors that are likely to benefit from the government's economic and financial rescue efforts, he said.
In the financial sector, Kiesel recommended major "'national champion' banks receiving policy support (which) are the linchpin of efforts to start circulating credit again."
Pimco is avoiding borrowers that are highly leveraged, he said. "We think that it's too soon to move into either equities or high-yield corporate bonds," Kiesel said.
Recovery rates for bondholders are likely to be very low as the impact of a severe economic recession continues to be felt, he warned.
For example, the average recovery rate for high-yield bonds during the first quarter of 2009 has been 9.5 percent, compared to 26.5 percent during 2008 and the long-term average of 35 percent to 40 percent, he said.
He expects the default rate on high yield bonds to rise to between 10 percent and 15 percent, with very low recoveries. That's in line with recent forecasts from credit rating agencies.
"The severity for bondholders is just starting," Kiesel said.
Among investment grade corporate bonds, the default rate could rise as high as 1.5 percent from about 0.4 percent currently, he said.
The U.S. housing market bust, which Kiesel forecast, may only be about half way over, he said.
"Housing cycles typically last about five or six years from peak to trough. If that pattern holds in this cycle, then we may be only slightly more than halfway through with further pressure on housing prices," Kiesel said.
Still, Kiesel expect the market to bottom in 2010, aided by government rescue efforts.
"I am getting closer to buying," he said by telephone.
Since the U.S. housing market peaked in mid-2006, housing prices have fallen by between 25 percent and 30 percent, Kiesel said.
Kiesel is expecting prices to fall another 10 percentage points and is waiting for banks to make mortgage credit more freely available. One of the biggest weights on the housing market now is the stringent conditions banks impose for mortgage lending, including down payments of about 20 percent on house purchases. (Reporting by John Parry; Editing by Leslie Adler)
