Bond outlook: Coupon rate to be the reward in new year; huge returns from '09 not likely to be repeated
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Emma Davies
      Octopus Ventures chooses co-CEO
      BEX Capital brings on head of origination
      Varagon Capital fills new business development role
      Fitch Group in deal to acquire CreditSights
    • Will Martindale
      Cardano Group chooses group head of sustainability
      Meketa hires first chief marketing officer
      Nick Horsfall
      Redington names managing directors for investment consulting team
      Marsh & McLennan Agency sets sights on Compass Financial
    • Yellen calls for more COVID relief, retirement access
      A healthcare worker provides care for a COVID-19 patient in the intensive care unit at the Saint Joseph hospital in Marseille, France, on Nov. 20, 2020.
      World must act to strengthen against future pandemics – report
      New York State Common challenges Tyson’s dual-share stock structure
      Credit managers’ outlook still gloomy but brightening – survey
    • Fidelity cuts target-date asset threshold for lower fees
      DCIIA looks to spark engagement with plan sponsor institute
      Ascensus, Empower acquire Truist record-keeping business
      PCS Retirement acquires Alliance Benefit Group-Rocky Mountain
    • LaSalle Investment Management taps 2 for new ESG roles
      Sovereign credit ratings vulnerable to ESG risks — Moody’s
      JPMAM names head of investment stewardship, Asia ex-Japan
      New law requires MassPRIM to increase diversity of managers, consultants
    • Galina Churkina
      Building research earns honor from Aquila Capital
      Blackstone holiday video
      Blackstone would like to show you how things are done around the office
      MacArthur Foundation invests in women’s safe housing fund
      Bill Harmon
      Voya offers fee break for minority-owned firms
    • Shanghai skyline
      Global hedge funds struggle even in a more open China market
      The Sun Hung Kai Properties Ltd. logo is displayed on the Sun Hung Kai Centre building in Hong Kong on Sept. 13, 2018
      SHK spins out East Point Asset Management
      Man holding a business card with Hedge Fund written on it
      Hedge funds chalk up decade’s best returns in 2020 – HFR
      New hedge fund launches surpass liquidations in third quarter
    • Finland's Varma chooses Nordea for emerging market equities
      Texas County & District picks direct lending fund for first 2021 commitment
      Phoenix Employees' Deferred Comp seeks stable value manager
      Morgan Stanley AUM rises 9% for quarter, 41% in year
    • Morgan Stanley AUM rises 9% for quarter, 41% in year
      A bull statue stands outside the Shenzhen Stock Exchange building in Shenzhen, China, on Sept. 4, 2019
      China ETF overtakes BlackRock fund as investors avert sanctions
      Dodge & Cox sets succession plan for key executives
      Onex Partners adds head of portfolio operations
    • CalPERS records 12.4% return in 2020
      Maine Public Employees boosts target to alternative credit
      Los Angeles City Deferred Comp narrows list to 2 in manager search
      Connecticut pension fund CIO resigns
    • Emma Davies
      Octopus Ventures chooses co-CEO
      Dodge & Cox sets succession plan for key executives
      BEX Capital brings on head of origination
      LaSalle Investment Management taps 2 for new ESG roles
    • Pension funds continue private equity investing spree
      Big jump in private equity AUM expected over next 5 years
      Thoma Bravo takes in $22.8 billion for 3 funds
      Jason Thomas
      Data, technology become new prized possessions
    • Chiang Ling Ng
      Hines hires first head of Asia-Pacific real estate investments
      Brand new apartment building on sunny day in spring with blooming trees
      Real estate returns forecast to trend lower – report
      Ivanhoe Cambridge Inc. signage is displayed outside the company's office near Bay Street in Toronto on Aug. 29, 2011
      Ivanhoe Cambridge, PAG announce joint venture for Japan logistics investments
      Residential buildings in Hong Kong on Feb. 20, 2020
      KKR closes first Asia-Pacific real estate fund at $1.7 billion
    • Neal and Brady
      Retirement security could be only issue both sides accept
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
      David Ireland
      Sponsors returning to questions about in-plan annuities
    • Outlook 2021
      The top 10 stories of 2020
      The best places to work in money management
      Investment consultants
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Finland's Varma chooses Nordea for emerging market equities
      Texas County & District picks direct lending fund for first 2021 commitment
      Phoenix Employees' Deferred Comp seeks stable value manager
      Oklahoma Firefighters commits $100 million to 2 real estate funds
    • Finland's Varma chooses Nordea for emerging market equities
      Texas County & District picks direct lending fund for first 2021 commitment
      Phoenix Employees' Deferred Comp seeks stable value manager
      Oklahoma Firefighters commits $100 million to 2 real estate funds
    • International Small Cap Manager Services
      Financial Expertise
      Passive Index Manager Services
      Emerging Markets Equity Investment Management Services
    • U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
      Hedge funds warming up to financial sector, remain long U.S. equities
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      view gallery
      25 photos
      2020 in editorial Cartoons
      view gallery
      25 photos
      Cartoons depict a year like no other
      Consultants cartoon
      Seeking an investment consultant? Caveat emptor
    • Climate change and emerging markets after Covid-19
      An Asset Owner's Guide to Multi-Manager Portfolio Management
      Research for Institutional Money Management
      The Future of the U.S. Dollar - Dominant currency or one of many?
    • Michael McNally
      Commentary: New ‘investment-plus’ test poses risks to private equity investors
      Adam Waterous
      Commentary: Institutions urged to act now on opportunities created by current global oil disruption
      Ron Lagnado
      Commentary: Straw man critiques don’t hold up in face of real world success
      Robert Raben
      Commentary: What the asset management industry must do to bolster diversity
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
      Sponsored Content By Aberdeen Standard Investments
      Taking a passive approach to the hedge-fund universe
      Sponsored Content By World Gold Council
      Gold: the most effective commodity investment
      Sponsored Content By Moody's Analytics
      The Industrialization of ESG Investment
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      1:24
      U.S. stocks were 2020’s comeback kid
      watch video
      1:23
      Outlook 2021
      watch video
      1:52
      Buy gold's pullback?
      Coronavirus and the S&P 500: 2020
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
      The Institutionalization of Retail Part Two: A Webinar Series from P&I Content Solutions and Chestnut Advisory Group
    • POLL: Retirement issues in 2021
      POLL: Money managers' priority in Asia-Pacific region
      POLL: Retirement issues in the presidential election
      POLL: The S&P 500 in the third quarter
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • Graphic: U.S. stocks were 2020's comeback kid
      U.S. fixed-income returns post another positive year
      By the Numbers
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
      The Institutionalization of Retail Part Two: A Webinar Series from P&I Content Solutions and Chestnut Advisory Group
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. Print
January 11, 2010 12:00 AM

Bond outlook: Coupon rate to be the reward in new year; huge returns from '09 not likely to be repeated

Randy Diamond
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Looking good: James Sarni sees Venezuela as an attractive candidate for investment.

    The coupon rate will have to be the reward for buying bonds in 2010 since the fixed-income issues won't be producing the spectacular returns that were seen last year, bond managers and consultants say.

    “2010 will be the year of the coupon,” said James Sarni, a managing principal at Payden & Rygel in Los Angeles.

    Mr. Sarni said investors will be getting the bulk of those returns from the coupons of fixed-income products because spreads have tightened during the past few months and bond prices should be relatively stable.

    That's a sentiment shared by other money managers and consultants.

    “With Treasury yields still at historically low levels and spreads having returned to more "normal' levels, investors should expect single-digit returns at best,” said Ford O'Neil, Boston-based manager of core-plus portfolios at Fidelity Investments and its Pyramis Global Advisors institutional business.

    The best strategy for institutional investors who'll be depending on the coupon rate for their returns is to avoid low-interest Treasuries and agency issues, say money managers and consultants.

    “We would expect that over the next decade, core-plus managers are poised to outperform core on due to their heavier weightings to credit, versus the core mandates, which are generally laden with Treasuries and agencies that have low yields due to being risk-free,” said Eric J. Petroff, director of research for Wurts & Associates in Seattle.

    For 2010, Mr. Sarni said he believes that corporate bonds rated BBB - still considered investment grade, and the top-rated categories of below-investment grade, BB, as well as emerging market debt, are good picks for investors because they typically offer coupon rates of at least 5%. But he is avoiding junk bonds with more lucrative yields because of their high risk of default.

    He particularly likes bonds from companies like DirecTV Inc., debt classified as BB. He also likes debt from Albertsons Inc., another BB issue, which was issued before it was acquire by SUPERVALU Inc. He said both companies have shown they are viable players in their respective categories of telecommunications and supermarkets.

    Mr. Sarni said since bonds from BB-rated companies are classified as higher risk and so pay interest rates between 7% and 8%, as much as 200 basis points more than investment-grade offerings, he said.

    “We believe that a core-plus strategy will do better relative to core,'' he said. “The higher yield offered on a core-plus strategy is a big part of this view.” Payden & Rygel manages $7.5 billion in core strategies and $5.3 billion in core-plus bonds, both as of Dec. 22.

    Another option

    Emerging market debt is another option favored by many investment professionals. For higher returns, Mr. Sarni said Venezuela, with its 13% coupon rate, is an attractive choice.

    “We believe that the bonds are attractively valued considering their sovereign status and the fact that the country enjoys considerable gross foreign exchange reserves, relatively low foreign debt as a percentage of GDP and high nominal GDP,” he said.

    While another factor to consider with Venezuela is the loss of investor credibility should President Hugo Chavez nationalize more and more industries, Mr. Sarni said Mr. Chavez is unlikely to jeopardize his access to global capital markets when, as and if needed.

    “In short,” Mr. Sarni said, “we think that the yield adequately compensates investors considering the aforementioned country fundamentals.”

    He also likes debt from countries like Brazil, Mexico, Philippines and Turkey. “They are good solid countries, they don't have high inflation and they have stable governments,” he said. The stability, however, means the coupon rate on that debt will be paying around 5%.

    Mr. Sarni and other fixed-income investment professionals believe that while better overall economic times domestically are ahead in 2010, continued high unemployment and high consumer debt levels will prove to be a roadblock that'll be tough to pass.

    “We are at the beginning of a long, protracted recovery,'' Mr. Sarni said. “It's going to take a while for the leverage to turn around.”

    Michael R. Ruff, portfolio manager with Russell Investments in Tacoma, Wash., said that while returns that reached as high as 100 % in 2009 won't be seen next year, Mr. Ruff said there still will be opportunities for strong gains in corporate issues, particularly given the spread between them and Treasuries.

    “We see that the spreads are still meaningful,” he said. “They're higher than historical norms. On a relative basis, the fact that spreads and yields are elevated shows a strong argument for credit.”

    Like Mr. Sarni, Mr. Ruff likes BB and BBB issues because he believes they offer solid yields, upward of 660 basis points above Treasuries, with limited risk.

    Mr. Ruff said he is not sold on junk bonds because history has shown there's a high number of corporate defaults in that category.

    He also favors buying non-agency mortgage-backed residential fixed-income bonds and commercial mortgage issues. Some of those securities might evoke unpleasant memories of the 2008 financial meltdown but Mr. Ruff said there are ways for institutional investors to minimize risk while maximizing returns.

    Mr. Ruff said while defaults in the commercial real estate sector are expected to increase to 18% in 2010 from 8% this year, investors who buy into issues on the super senior level will be protected from the first 30% of losses. “It is a very compelling area,” he said.

    Curtis Arledge, New York-based managing director and co-head of U.S. fixed income in BlackRock Inc.'s fixed-income portfolio management group, said the asset manager has been experiencing strong inflows from pension funds into core-plus investment strategies.

    Mr. Arledge, like many managers interviewed for this story, believes that a key strategy for success in 2010 will be picking the debt issues of companies that are going to thrive. He likes the bottom levels of investment-grade corporate bonds and the top category of below-investment-grade securities.

    “We believe it is a year of filtering out the winners from the losers,” he said.

    Mr. Arledge also agrees returns will be in the single digits, except for riskier, lower-grade corporate bond offerings.

    He said BlackRock is also looking at non-agency securitized mortgage issues and securitized commercial mortgage-backed securities. He said the securities can be tailored to the risk preferences of institutional investors.

    He said his company is also interested in emerging market debt in countries where economies are building and continued growth is likely, such as Brazil.

    Risk varies

    The level of risk institutional investors want in the fixed-income area, however, varies tremendously.

    Some institutional investors aren't comfortable with high levels of risk given the massive losses they experienced in 2008, said Alan Papier, a principal in the manager research group of Mercer's investment consulting business in Chicago.

    While institutional investors regained much of the ground they lost in 2008, Mr. Papier said the volatility of the marketplace has not sat well with some of them.

    “We are having conversations with clients as to how much alpha you really want to strive for,” he said.

    On the other hand, he added, other institutions, particularly larger ones, are ready to take on the risk in an effort to maximize returns.

    “In general, we found some clients are perfectly comfortable with the risks,” he said. “Some clients have replaced core managers with core-plus managers.”

    He said conversations with those pension plans have revolved around investments in the higher categories of non-investment-grade corporate issues and non-agency mortgage-backed securities. He would not release names of clients.

    The big unanswered question is how well the marketplace will absorb an expected $2 trillion in new Treasury and agency debt in 2010. In 2009, the $300 billion in net new supply in the Treasury market was absorbed by sovereign wealth funds, foreign central banks and U.S. citizens, said Mr. O'Neil of Fidelity and Pyramis.

    That means buyers will need to increase their net purchases of Treasuries, he explained, and new buyers will be needed or rates will be pressured upward.

    While bond markets are affected by tactical considerations and valuations, there is also a strategic shift happening, said Bob Collie, managing director, investment strategy and consulting at Russell Investments. That is pension plan executives are becoming more aware of risk, and in particular of the mismatch between assets and liabilities.

    The shift is being influenced by corporate defined benefit plans and likely will continue to have an impact on bond markets in 2010, he said. The average corporate defined benefit plan has increased its bond allocation by just a few percentage points in the past couple of years, he added, as part of efforts to increase strategic allocations to this asset class over time.

    Related Articles
    Equity outlook: Ringing in the new year with an air of uncertainty and overtone…
    Um, no Champagne just yet
    Equity outlook: Ringing in the new year with an air of uncertainty and overtone…
    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    Targeting millennials: Author, niece put his latest book to music
    Targeting millennials: Author, niece put his latest book to music
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Climate change and emerging markets after Covid-19
    An Asset Owner's Guide to Multi-Manager Portfolio Management
    Research for Institutional Money Management
    Bond ETFs show maturity during Covid market mayhem
    Global gold-backed ETFs: A popular gateway to the gold market
    The Future of the U.S. Dollar - Dominant currency or one of many?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center