BlackRock Sees Risk in Europe’s Bonds
By Amey Stone
By Amey Stone
A new report from BlackRock suggests that now may be a good time for investors to get back into Europe — but only the equities, not the bonds.
A shift in investor sentiment has already sparked higher bond and stock prices, points out BlackRock’s Global Chief Investment Strategist Russ Koesterich in the report released Tuesday. He writes:
Despite the various short- and long-term challenges facing Europe, valuations on European equities support a higher allocation to the asset class. The same cannot be said of European fixed income markets.
He estimates that a quarter of European sovereign debt now has a negative yield. German 10-year bonds yield just 30 basis points — a level not seen since 1815 when they were obligations of Prussia. Italian 10-year yields were nearly 5% in the summer of 2013. Now they are 1.5%. He writes:
Thanks to negative inflation and the ECB’s new bond buying scheme, even those willing to take on marginal credit risk in European peripheral bonds receive little compensation for their troubles.
Koesterich does think there are a few niche fixed income opportunities, such as European high yield.
By Amey Stone
The high stakes game of parsing Fed Speak has taken a perplexing turn: Instead of simply wondering if the Federal Reserve will drop the word “patient” when it delivers its latest statement Wednesday afternoon, now many economists are wondering if it will swap in some new language altogether.
Fed Chair Janet Yellen told Congress in late February the next step on the way to a rate hike would be for the Fed to remove the word “patient” from its forward guidance. Then “liftoff” could come a couple of meetings after that.
And, since the economic news (especially about jobs), has been good, most Fed watchers think “patient” will be removed, creating room for the Fed to raise rates as soon as June.
But in the last few days, some strategists have introduced a third option. The now posit that the Fed will replace “patient” with some other phrase that means much the same thing.
Case in point: In the firm’s weekly economic commentary, Stragegas economist Don Rissmiller wrote:
We continue to see two reasonable Fed options for the upcoming March 2015 FOMC meeting as: 1) keep the “patient” language, suggesting rate hikes are not imminent, or 2) swap “patient” for other forward guidance that has a similar meaning. However 3) dropping “patient” altogether is unlikely, in our view. It’s a Fed swap rather than a Fed drop.
He wasn’t alone on Monday in suggesting the replacement language would still leave room for the Fed to postpone liftoff if it sees fit.
“I believe that patient is coming out, but we’re going to see another round of linguistic gymnastics, Mohamed El-Erian, former chief executive of Pimco, said on CNBC on Monday. He thinks Yellen may say something about needing to be “sufficiently confident” that inflation will reach the Fed’s 2% target before a rate hike.
Tom Kersting, fixed income strategist at Edward Jones, thinks a replacement phrase is likely, but that it won’t change the basic fact that a rate hike is coming. He told Barron’s:
A lot of people are very focused on what the Fed says and subtle and small changes in language. But taking a step back, the economy is headed in right direction so ultimately we expect interest rates to rise at some point. Whether it’s June or August or later in the year is a lot less important than making sure your portfolio is properly positioned.
By Amey Stone
Bond guru Marilyn Cohen invoked none other than the Rolling Stones in a report Tuesday urging investors to sell any remaining Puerto Rico bonds.
The CEO of Envision Capital Management and author of The Bond Bible, says she started humming a Stones’ tune while reading about how some lawmakers in Puerto Rico have proposed a new bill restructuring the country’s debt.
Her refrain: “Here it comes. Here comes your nineteenth nervous breakdown.” Cohen writes:
We’ve been yammering, maybe even hectoring, investors to get out of their Puerto Rico municipal bonds and bond funds unless they are prerefunded and escrowed with Treasurys. Even though there are only three voices from the Puerto Rico House of Representatives advising a debt restructure, their financial hurdles are daunting — Here it comes.
Cohen doesn’t think the island nation, which she says has only 647,000 people employed in the private sector, can cover its $70 billion in debt and $33 billion in underfunded pensions.
Puerto Rico has been battling its fiscal crisis for years now. In August, 2013, a Barron’s cover story, “Troubling Winds” warned investors about the worsening financial picture in Puerto Rico. That article concluded, “The tempting yields on Puerto Rico debt aren’t enough to compensate for the risk.” No doubt Cohen feels that statement is even more true today.
By Amey Stone
Appetite for the debt ofValeant Pharmaceuticals(VRX) increased after the pharmaceutical company sealed its $11 billion deal forSalix Pharmaceuticals(SLXP) on Monday. Valeant upped its all-cash bid to $173 a share up from $158. RivalEndo International (ENDP) withdrew its cash and stock bid of $175 per share.
Last week, despite Endo’s rival bid, Valeant issued $10.1 billion in new debt to fund the deal. It was the third-largest high-yield deal in history, according to LCD, a division of S&P Capital IQ that focuses on the leveraged finance marketplace.
Despite the higher purchase price, LCD analysts noted Monday that the new bonds traded higher:
“Valeant’s bonds, meanwhile, were met with more buying interest this morning amid ongoing demand for the huge, benchmark issues, as well as more confidence about the paper staying in place since the rival stepped back.”
On Tuesday, Matthew Fuller, a director at LCD said most tranches are trading 1/2 to 1 1/2 points higher than the offering price. For example, the initial whisper number for the 10-year bond was that it would price to yield 6.5%, official price talk was in the 6.25% area. Actual pricing was at the tight end of that indication, at 6.125%. Tuesday, at roughly 101.75 in secondary trading, the yield is 5.85%.
Valeant also priced $1.45 billion in new shares at $199 each on Tuesday to help fund the Salix purchase.
At least one high-yield analyst is skeptical the deal can live up to its goals.Vicki Bryan of Gimme Credit reiterated her “underperform” rating on Valeant Monday, raising questions about whether the deal will add to earnings and if Valeant overpaid. She also has worries about Salix’ pipeline. She wrote:
“Valeant has one of the weakest credit profiles by far of any major drug company. It’s about to get worse now that Valeant is poised to buy troubled Salix Pharmaceuticals with a deal that will push total debt to $30 billion — that’s 3x our estimate of pro forma 2015 revenue and 6.4x EBITDA.”
Meantime, Endo is earning praise from some stock analysts for withdrawing its bid
By Amey Stone
Speculative-grade defaults rose in February, according to a new report fromMoody’s Investors Service. The rate was 2.3%, up from 2.1% in January. It was lower than the agency predicted a year ago when it thought defaults would total 2.6% by this time in 2015.
So far there have been nine corporate defaults this year, five of them in the U.S.
Moody’s expects the default rate to tick up to 2.5% by the end of the year. That is still well below the historical average of 4.5%.
Looking just at Moody’s global distressed index — the high-yield issuers with debt trading at distressed levels — the default rate was 18.4% in February, slightly down from 18.6% in January. It was more than 10 points higher than the 8% rate of a year ago.
In the leveraged-loan market, there were two defaults last month, Altegrity andRadioShack (RSHCQ).
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