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S&P Capital IQ Fund Research - US Fixed Income Fund Managers Still See Value in Credit Markets

LONDON, Feb. 11, 2013 /PRNewswire/ -- US fixed income fund managers continue to see value in the credit markets as a whole, although parts of it are deemed expensive, says S&P Capital IQ's Fund Research in its latest sector trends paper, available at www.marketscope.com.

"Most of the fund managers we interviewed were overweight spread product relative to their indices, but this is a structural feature of the US fixed income fund sector, particularly for funds managed against aggregate indices," observed Kate Hollis, S&P Capital IQ fund analyst and sector head of fixed income.

Many managers were overweight financials, which were still yielding more than industrials, and many (such as Pioneer) were aiming to move up in credit quality where this was possible without sacrificing too much yield. Many investment grade funds had bought small amounts of crossover high yield names, to produce extra yield and increase the potential for spread tightening should they be upgraded.

Corporate balance sheets are strong, as are earnings, and default rates are likely to stay low. Technicals are still supportive and BlackRock noted that any sell-off in credit markets would be met with further buying; at the short end from investors looking to switch out of cash, and at the long end from pension funds.

Managers believe spreads are still likely to shrink in 2013 but most of the return will come from income. However, MFS Investment Management pointed out that some industrials are back to the same spreads as in 2006. AllianceBernstein agreed that valuations are tight but that carry and roll-down will continue to add extra return until the long end of the Treasury market begins to back up.

Meanwhile, a large leveraged buyout (LBO) of Dell has sparked credit analysts to review their sectors for other potential buyout candidates.

Many groups were overweight agency mortgage-backed securities (MBS) as they believe the Fed will keep prices supported to avoid any rise in mortgage rates slowing the housing market again. Although agency pass-throughs are negative convexity instruments, most managers believe any rise in volatility this year will be associated with politics and will be temporary. Many managers also had small amounts of commercial mortgage-backed securities (CMBS) on which they were starting to take profits. However, T Rowe Price is letting its MBS positions diminish naturally and reinvesting in asset-backed securities to reduce the pre-payment risk.

Media Contact:

Stefanie Ives/David Sells, Citigate Dewe Rogerson: 0207 282 2815/63

S&P Capital IQ, a brand of the McGraw-Hill Companies (NYSE: MHP), is a leading provider of multi-asset class data, research and analytics to institutional investors, investment advisors and wealth managers around the world. We provide a broad suite of capabilities designed to help track performance, generate alpha, identify new trading and investment ideas, and perform risk analysis and mitigation strategies. Through leading desktop solutions such as Capital IQ, Global Credit Portal and MarketScope Advisor desktops; enterprise solutions such as S&P Securities Evaluations, Global Data Solutions, and Compustat; and research offerings, including Leveraged Commentary & Data, Global Market Intelligence, and company and fund research, S&P Capital IQ sharpens financial intelligence into the wisdom today's investors need. 

S&P Capital IQ fund research: A fund report is not investment advice, a financial promotion or a recommendation to purchase, hold, sell or trade any security.  A report should not be relied on when making an investment decision as the report is for information purposes only and not tailored to a specific investor. Past fund performance is no guarantee of future performance and we accept no responsibility if, in reliance on a report, you act or fail to act in a particular way. Our fund management reports are continuously monitored and updated reports are posted to www.marketscope.com

© 2013 McGraw-Hill Financial, 20 Canada Square, Canary Wharf, London, E14 5LH Tel: +44 (0)20-7176 3800. All rights reserved.

SOURCE S&P Capital IQ

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