Homepage
PR Newswire
23-08-2014, 10:07 PM
QE creates pent-up demand for long bonds
Mark Mulligan
774 words
20 Aug 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Central bank action to stimulate demand is depriving private-sector investors of long-dated bonds, creating ideal conditions for corporate issuance, according to a senior executive at global credit investor Pimco.
Deputy chief investment officer and managing director Mark Kiesel said on Tuesday that asset-buying programs by the US Federal Reserve and other central banks had soaked up a lot of government issuance and other long-dated bonds.
"Central banks are playing a big role in influencing asset prices," he said. "But the simple fact is that demand for income-producing assets exceeds the supply of these assets."
His comments came as the European Central Bank mulls its own form of asset-buying – known as quantitative easing – in response to stagnant second-quarter GDP in the euro zone.
Monetising government debt held by banks frees up credit to stimulate lending to households and business, and so drive recovery.
The US Federal Reserve is currently winding down its own quantitative easing programme, but is unlikely to lift policy interest rates before the second quarter of next year, according to most estimates.Mortgage-backed bonds
Mr Kiesel forecasts the Fed will hold off until the second half of 2015.
The ECB,which cannot buy government bonds under the terms of the Maastricht Treaty, may be restricted to targeting mortgage-backed bonds normally sold to private investors if it opts to step up credit easing.
Mr Kiesel said with central banks around the world unlikely to hike interest rates for "an extended period", investor appetite for yield would not abate.
"In Asia, you have large investors who are traditionally invested in government bonds diversifying now into corporate bonds," he said.
"You've got pension funds in the UK and the US that are trying to immunise their long-term liabilities with assets.
"They need high-quality, fixed income-producing assets."
He said only 15 per cent of the corporate bond market was longer-term.
"The demand for long-maturity, high-quality high-income-producing assets is huge.Why spreads are tightening
"So the supply is, quite frankly, not enough to meet the demand and that's why the spreads are tightening."
With $US1 trillion ($1.07 trillion) in assets under management, Pimco is one of the world's biggest bond investors. Mr Kiesel said that with most economies in the world struggling to cement real growth, investment opportunities were emerging in sometimes unlikely pockets.
In the US, monetary easing had helped fuel recovery, but not without widespread corporate casualties.
He said Pimco had spotted opportunities among corporate issuers in consolidated markets such as travel and tourism, telecommunications, home-building and gaming.
"What's happened is that coming out of recession, there's been consolidation in a lot of these industries.
"There is less competition now, so you've recovered in a market that has not added a lot of supply, and that's why you're getting some pricing power in supply."
He said the same applied to companies operating in sectors or industries with high barriers to entry, such as gaming.
Pimco is heavily invested in Macau, the former Portuguese colony and special administrative zone of China whose economy is based on tourism and gaming.Control prices, retain margins
In Australia, Pimco's senior vice-president and credit analyst Tracy Chin has identified Asciano, which hauls coal between mines and east coast ports, as a company with little competition in market with high barriers to entry.
Despite's faltering demand for coal, miners are tied to take-and-pay contracts with the haulier, allowing Asciano to control prices and retain margins.
Businesses such as these – and those with tangible assets such as healthcare – offered sound investment opportunities, he said.
Pimco was also bullish on shale oil and gas in the US, in which he said there was "a revolution".
However, despite these bright spots, the world – and hence its corporations – faced tough times, he said.
"Central banks are going to be stuck with permanently higher balance sheets over a longer period than people think," Mr Kiesel said."And the reason is that growth is going to struggle."
"While the US is picking up, in general Europe is still struggling – geopolitical tensions with Russia are going to slow growth there.
"Japan is struggling to get real growth. Emerging market growth is slowing. So, from a macro perspective, we are still in a world that lacks aggregate demand.
"Basically, investors are going to have to lower their return expectations for financial assets," he said.
Fairfax Media Management Pty Limited
Document AFNR000020140819ea8k0002c
Mark Mulligan
774 words
20 Aug 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Central bank action to stimulate demand is depriving private-sector investors of long-dated bonds, creating ideal conditions for corporate issuance, according to a senior executive at global credit investor Pimco.
Deputy chief investment officer and managing director Mark Kiesel said on Tuesday that asset-buying programs by the US Federal Reserve and other central banks had soaked up a lot of government issuance and other long-dated bonds.
"Central banks are playing a big role in influencing asset prices," he said. "But the simple fact is that demand for income-producing assets exceeds the supply of these assets."
His comments came as the European Central Bank mulls its own form of asset-buying – known as quantitative easing – in response to stagnant second-quarter GDP in the euro zone.
Monetising government debt held by banks frees up credit to stimulate lending to households and business, and so drive recovery.
The US Federal Reserve is currently winding down its own quantitative easing programme, but is unlikely to lift policy interest rates before the second quarter of next year, according to most estimates.Mortgage-backed bonds
Mr Kiesel forecasts the Fed will hold off until the second half of 2015.
The ECB,which cannot buy government bonds under the terms of the Maastricht Treaty, may be restricted to targeting mortgage-backed bonds normally sold to private investors if it opts to step up credit easing.
Mr Kiesel said with central banks around the world unlikely to hike interest rates for "an extended period", investor appetite for yield would not abate.
"In Asia, you have large investors who are traditionally invested in government bonds diversifying now into corporate bonds," he said.
"You've got pension funds in the UK and the US that are trying to immunise their long-term liabilities with assets.
"They need high-quality, fixed income-producing assets."
He said only 15 per cent of the corporate bond market was longer-term.
"The demand for long-maturity, high-quality high-income-producing assets is huge.Why spreads are tightening
"So the supply is, quite frankly, not enough to meet the demand and that's why the spreads are tightening."
With $US1 trillion ($1.07 trillion) in assets under management, Pimco is one of the world's biggest bond investors. Mr Kiesel said that with most economies in the world struggling to cement real growth, investment opportunities were emerging in sometimes unlikely pockets.
In the US, monetary easing had helped fuel recovery, but not without widespread corporate casualties.
He said Pimco had spotted opportunities among corporate issuers in consolidated markets such as travel and tourism, telecommunications, home-building and gaming.
"What's happened is that coming out of recession, there's been consolidation in a lot of these industries.
"There is less competition now, so you've recovered in a market that has not added a lot of supply, and that's why you're getting some pricing power in supply."
He said the same applied to companies operating in sectors or industries with high barriers to entry, such as gaming.
Pimco is heavily invested in Macau, the former Portuguese colony and special administrative zone of China whose economy is based on tourism and gaming.Control prices, retain margins
In Australia, Pimco's senior vice-president and credit analyst Tracy Chin has identified Asciano, which hauls coal between mines and east coast ports, as a company with little competition in market with high barriers to entry.
Despite's faltering demand for coal, miners are tied to take-and-pay contracts with the haulier, allowing Asciano to control prices and retain margins.
Businesses such as these – and those with tangible assets such as healthcare – offered sound investment opportunities, he said.
Pimco was also bullish on shale oil and gas in the US, in which he said there was "a revolution".
However, despite these bright spots, the world – and hence its corporations – faced tough times, he said.
"Central banks are going to be stuck with permanently higher balance sheets over a longer period than people think," Mr Kiesel said."And the reason is that growth is going to struggle."
"While the US is picking up, in general Europe is still struggling – geopolitical tensions with Russia are going to slow growth there.
"Japan is struggling to get real growth. Emerging market growth is slowing. So, from a macro perspective, we are still in a world that lacks aggregate demand.
"Basically, investors are going to have to lower their return expectations for financial assets," he said.
Fairfax Media Management Pty Limited
Document AFNR000020140819ea8k0002c