Your Needs Our Focus
Financial Bulletin
The premium is only half the reasonable level! Pimco: The hottest investment at present is too expensive.
The risk is undercurrent, and private corporate bonds seem to be overvalued?
Recently, the Pacific Investment Management Company (Pimco) warned that the current return on private corporate bonds could not justify the growing risks. Mohit Mittal, chief investment officer of Pimco's core strategy, said:
"Some fundamentals with higher leverage in the corporate bond market are deteriorating, and complacency in the market is spreading, so you must think carefully-you must be very careful."
Since 2019, the market size of private corporate bonds has doubled and expanded to a market of 1.7 trillion US dollars. At the same time, compared with direct loans, the return rate of listed corporate bonds has been greatly reduced.
Pimco, which manages about $1.9 trillion in assets, points out that the compensation required to switch from listed corporate bonds to private corporate bonds is much higher than 200 basis points, but this is not seen in the current market. Mittal also said in an interview with Bloomberg that the premium is only half of what he thinks is reasonable:
"At present, the excess premium for leveraged investment with poor liquidity is about 190 basis points on average. In investment-grade bonds, the premium paid by private corporate bonds is about 50 basis points higher than that of listed corporate bonds, which is half of the 100 basis points return they should provide."
The increase in the yield of investment in listed corporate bonds and loans aims to compensate investors for the risks brought by "the relative lack of liquidity and quality difference of private corporate bonds". Mittal stressed that it should also cover the risks locked in investment for a long time and the possible excess returns in the open market.
Mittal said, "As the rate of return has increased in the past two or three years, the opportunity cost of switching from public fixed income to private fixed income has also increased. This is one of the reasons why we strongly prefer high-quality public fixed income to private fixed income. "
It is worth noting that although Mittal admits that the spread between listed corporate bonds and private corporate bonds may be further narrowed, he believes that the pressure of private corporate bonds is accumulating. He also pointed out that the lender protection measures for direct loans are weak:
"What you have observed is that 40% of companies now have a fixed fee coverage rate of less than 1, which means that the cash flow they generate is not enough to pay interest expenses. “
Despite being cautious about the future of private corporate bonds, Pimco is still optimistic about the private market, especially in the consumer sector, including housing, aviation finance, equipment leasing and data centers, which have good asset coverage.
Mittal also pointed out that in the next three to five years, the performance of asset-backed loans will be very different from that of private corporate bonds. The company is optimistic about the markets of the United States, Britain, Australia and Canada, while in terms of industries, it prefers finance, public utilities, consumer goods and telecommunications, as well as technology and medical care in leveraged finance. But he is cautious about the debts of the retail and automobile industries.
Mittal said that the best corporate bond opportunity in the next 12 months is high-quality institutional mortgage loans. Pimco expects these loans to perform well even in the case of slowing growth and inflation recovery:
"This is a spread product that can perform well in all situations."
Risk warning and exemption clause
The market is risky and investment needs to be cautious. This paper does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, viewpoints or conclusions in this article are in line with their specific situation. Invest accordingly at your own risk.