Pimco to Blackstone Preparing to Feast After Yield Surge.

http://www.bloomberg.com/news/2014-10-17/pimco-to-blackstone-preparing-to-feast-after-yield-surge.html

In a junk-bond market that has been anything but high-yield for almost two years, the world’s biggest debt-fund managers have been stockpiling cash for a selloff. After the worst one in three years, they’re getting ready to pounce.

Firms from Pacific Investment Management Co. to Blackstone Group LP say they are poised to scoop up speculative-grade corporate bonds after yields rose to the highest levels in more than a year. They’re looking for bargains after building up the highest levels of cash in almost three years.

“Credit is a buy here, specifically high yield” bonds and loans, Mark Kiesel, one of three managers who oversee Pimco’s $202 billion Total Return Fund, said yesterday in a Bloomberg Television interview.

At Blackstone, Chief Executive Officer Stephen Schwarzman told investors yesterday that the firm’s $70.2 billion credit unit is ready to “feast” on lower-rated, long-term debt, particularly in Europe, after “waiting patiently for something bad to happen.”

Taxable corporate-bond mutual funds tracked by the Investment Company Institute increased the proportion of cash and cash-like instruments they set aside to 8.5 percent of their $1.96 trillion of assets in August. That’s up from a three-year low of 4.9 percent in April 2013 and the most since November 2011, ICI data show.

Staying Flexible

By amassing cash or parking money in easy-to-sell debt such as Treasuries, fund managers have been maintaining flexibility to swoop in and buy securities at discounts.

Average yields on speculative-grade bonds sold by companies from the U.S. to Japan climbed to 6.67 percent yesterday, jumping more than 1 percentage point from a record-low 5.64 percent in June, according to Bank of America Merrill Lynch index data. The debt is now paying 5.3 percentage points more than government bonds, the widest spread since July 2013 and up from 3.6 percentage points in June. The market hasn’t moved that much since the European debt crisis in 2011, the index data show.

In the market for leveraged loans, prices dropped to the lowest levels since 2012, with the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index falling 1 cent this week to 95.7 cents on the dollar.

Slim Returns

After pocketing average annual returns of 19 percent since the 2008 financial crisis, junk-bond investors worldwide this year are facing the slimmest gains of the past six years. The Bank of America Merrill Lynch Global High Yield Index has fallen 2.76 percent since June 30, after rising 5.86 percent in the first half. Returns this year of 2.9 percent through Oct. 15 compare with 7.1 percent in all of 2013.

Derivatives Bets

“Even when prices go down, it’s hard to buy paper,” Gershon Distenfeld, director of high yield at AllianceBernstein Holding LP, which oversees $473 billion of assets, said in a telephone interview. “Everyone thinks they’re gonna do X, Y and Z,” but can’t because the liquidity isn’t there.

One way fund managers are getting around that is by selling insurance-like derivatives known as credit-default swaps, which pay them for taking on the risk that companies won’t repay their debt. Trading in the Markit CDX North American High Yield Index, a benchmark instrument for such wagers, surged to 269 percent more than the daily average on Oct. 15 and 177 percent more yesterday, data compiled by Bloomberg show.

Blackstone Chief Executive Officer Stephen Schwarzman told investors yesterday that the firm’s $70.2 billion credit unit is ready to “feast” on lower-rated, long-term debt, particularly in Europe, after “waiting patiently for something bad to happen.”

Waiting for something bad to happen.