Friday, April 17, 2009

isn’t clear how the burden of a banking recovery will be shared between private investors and taxpayers

TO BE NOTED: From Bloomberg:

"Pimco Favors Bonds of Health-Care, Telecom and Drug Companies

By Tom Kohn and Oliver Biggadike

April 17 (Bloomberg) -- Bonds of telecom, health-care and pharmaceutical companies offer the best bet for investors as these industries are less vulnerable in a slowing economy than other sectors, according to Pacific Investment Management Co.

“Pimco will focus on non-cyclical defensive industries that have the potential to outperform in an environment of weak growth,” the world’s biggest bond-fund manager said in a report yesterday, without naming any companies.

A “severe” global recession will last throughout 2009 and keep global interest rates at low levels, Pimco said. That means the yield on 10-year U.S. Treasuries will probably range between 2 percent and 3 percent over the next year, the Newport Beach, California-based company said.

Telecom, health-care and pharmaceutical companies may be more resistant than peers such as retailers to swings in consumer demand amid a global recession the International Monetary Fund says has “worrisome parallels” to the Great Depression of the 1930s. Corporate bonds of so-called non- cyclical companies returned 5.5 percent this year, compared with 1.94 percent for companies in cyclical services, according to Merrill Lynch & Co. indexes.

“The world cannot rely on the U.S. consumer to be the spender of last resort,” Pimco said in the report, a second- quarter market outlook that didn’t list an author. “Interest rates are unlikely to rise and could trend downward from current levels.”

International Monetary Fund Managing Director DominiqueStrauss-Kahn yesterday said “deeply negative” growth will precede a global turnaround likely next year. The global economy in the grip of a “severe recession,” the IMF said in its World Economic Outlook.

Junk Bonds

Pimco won’t add to investments in “mostly senior” financial bonds because isn’t clear how the burden of a banking recovery will be shared between private investors and taxpayers, it said.

Junk bonds rated lower than Baa3 by Moody’s Investors Service or BBB- by Standard & Poor’s are also out of favor, the bond-fund manager said.

“Pimco is not ready to venture into high-yield corporate bonds at this point in the economic cycle,” it said.

The difference in yield between shorter-term notes and longer-maturity debt is unlikely to narrow “any time soon,” the note said. The yield on the Treasury’s 10-year note plunged 47 basis points to 2.53 percent on March 18 after the Federal Reserve announced plans to pump money into the economy by purchasing government debt. The security has traded at yields between 2.46 percent and 2.94 percent since.

Mark Porterfield, a spokesman for Pimco, confirmed the contents of the report. The asset-management company oversaw $747 billion as of the end of 2008, according to its Web site."

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