Global bonds look good
Despite interest rates being at historically low levels there are still good opportunities for investors to make money in this sector, John Wilson, the executive vice president of US-based fund management firm PIMCO says.
Tuesday, March 25th 2003, 2:37AM
The proposition that there is still good money in international fixed interest investments has many people scratching their heads. After all rates are at what seems like all time lows and when they start rising again capital invested in this sector will be eroded.
"We are at the terminal stages of a 20 year bull market in bonds," PIMCO executive vice president John Wilson told Good Returns last week.
However, Wilson, whose firm manages money on behalf of Tower Asset Management, reckons there are good opportunities.
He agrees interest rates in the United States are low and will start drifting higher soon (unless the war in Iraq is dragged out) so the opportunities in the government debt market in the US aren't particularly great. Yet, there is still plenty of room to make money in corporate debt securities.
Wilson says rates on corporate debt are, in many cases, much higher than they need to be because of blanket concerns over corporate governance and reporting issues.
He believes once these issues pass yields will come down, thus creating windfall profits for investors prepared to take on the risk.
Currently PIMCO is overweight in BBB rated corporate debt in the US.
"While rates on government debt may be at cyclical lows, yields on corporate debt are high," he says.
"To us this looks like an outstanding opportunity to add some selected corporate names to the portfolio and earn some very attractive rates of return."
The story across the over side of the Atlantic is quite different. Wilson believes that "structural impediments and policy inertia" in Europe mean there is a high likelihood rates still have some room to decline. Likewise corporate debt rates are high.
He says the US is moving into a period of reflation, while Europe is "frankly on the point of tipping into recession."
Wilson reckons international bonds look highly attractive on a risk/return basis to shares.
Shares are likely to return about 7%, with 16% volatility in the next year, while bonds will do about 6% with just 3% volatility.
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