Mark Kiesel, head of global credit at PIMCO, a unit of German insurance company Allianz, has found himself at the front-line of a wobbly global economic outlook.
In an interview with Handelsblatt, the 46-year-old manager, explained why he favored bond buying in the United States following the European Central Bank’s decision to snap up corporate bonds.
The interview took place before the U.S. asset manager on Wednesday announced that Emmanuel Roman would be its new chief executive officer, replacing Douglas Hodge. The California-based company said Mr. Roman, 52, currently chief executive of the Man Group, would take the helm in November.
Mr. Kiesel eyed a robust U.S. economy but saw Britain’s decision to exit the European Union as sparking further interest rate cuts in the country. Together with Scott Mather and Mihir Worah, he manages Pimco's $100 billion, or around €90 billion, flagship fund Total Return. He also oversees the almost $15 billion Global Investment Grade Credit Fund.
The Brexit vote forces central banks to continue and potentially even extend their easing measures.
PIMCO, which was bought by Allianz in 2000, had $1.5 trillion assets as of March 31, mostly invested in bonds.
Asset management continued to cause headaches for Allianz last year when its operating profit fell 12 percent in the division because of German asset manager Allianz Global Investors and the far-larger U.S. subsidiary, PIMCO.
Handelsblatt: The ECB started buying corporate bonds five weeks ago. Are you following that example and adding to your exposure in these securities?
Mark Kiesel: The opposite is the case. We try to avoid buying bonds at prices that are subsidized by central banks.
But the ECB demand pushes price higher.
Yes, but the potential for further gains is limited. Yields are already artificially low, driven by central banks including the European Central Bank and the Bank of Japan. That is why we void most European and Japanese government bonds. Today, about 85 percent of the European and Japanese government bond markets yield negative rates. We are avoiding investments in negative yielding bonds.
Many investors complain about negative yields. Might that keep central banks from further easing?
No. In fact, the Brexit vote forces central banks to continue and potentially even extend their easing measures. Although the Bank of England did not changed its policy rates last week, we expect them to ease soon. The BoJ could lower rates further into negative territory and the ECB will most likely extend its quantitative easing program.
What about the Fed?
The British decision against the European Union membership has ruled out any rate hike by the fed in the next weeks but we can still imagine one rate hike in December. The U.S. economy is strong and we expect a real growth rate of about 2 percent this year and a pick-up in inflation to 2 percent in the next six months.
Both would be bad for U.S. bonds, wouldn’t it?
Theory suggests that rising inflation or rising policy rates also lead to higher yields for longer maturities. However, in the current environment global capital flows are more important drivers of bond yields in the U.S. than inflation data or Fed policy. And we see continued strong capital flows to the U.S. and especially in credit.
What do you mean by that?
We see huge moves by European and Asian investors into U.S. credit as they are facing low yields in their home countries. This will not change any time soon as demand for income-generating investments persists.
We see huge moves by European and Asian investors into U.S. credit as they are facing low yields in their home countries. This will not change any time soon. Mark Kiesel, head of global credits at Pacific Investment Management Co
Yields on high quality U.S. bonds have already fallen significantly. Are they still attractive?
Yes, definitely. At the beginning of this year, we called out the year of credit and we still believe in that. Valuations in the U.S. are much more attractive than in Europe plus the U.S. economy is doing better.
Which segments of the credit markets do you like in particular?
We like sectors that are related to U.S. consumer spending. That includes building materials, healthcare, telecom, cable and gaming. In addition, we have invested in the energy and pipeline sectors when prices had been at their bottom in February and March. In the meantime, we have reduced some of this exposure as bonds rallied but we still see opportunities in oil and gas. U.S. and U.K. banks is another sector that we like on the credit side.
Bank bonds haven’t performed well with a return of just about 0.5 percent so far this year.
Banks may not earn as much as the low interest rates harm their margins. But they are still profitable. In addition, recent regulatory changes force them to keep more capital, which makes them safer for investors. We like bonds of Wells Fargo, Citi and JPMorgan, for example.
What returns can investors expect with US credit over the next 12 months?
High-quality corporate bonds should be able to deliver a return of 3-4 percent over 12 months. My Global Investment Grade Credit Fund, with a focus on high grade bonds, has delivered a performance more than 5 percent year to date. This is particularly interesting to European and Japanese investors who are facing negative yields in their home currencies.
Andrea Cünnen works at Handelsblatt's finance desk in Frankfurt, reporting on the bond markets. To contact the author: [email protected]