PIMCO and TCW Group are investing in bonds guaranteed by aircraft as U.S. carriers hold back from adding seats to protect profitability, preserving the value of their planes.
Junk-rated airline bonds, including enhanced equipment trust certificates from Delta Air Lines and UAL, have returned 1.4% this month compared with an overall 0.05% gain for high-yield notes, Bank of America Merrill Lynch indexes show. The gap, the widest since May, comes after their debt trailed by 0.44 percentage points in July.
The debentures are gaining appeal as traffic for the nine biggest U.S. carriers rose 1.9% this year through July compared with the same period last year, according to data compiled by Bloomberg. More than 600 planes, many of which are older and less fuel-efficient, have been parked since the start of 2008 to slash capacity during the recession. That makes the remaining aircraft more valuable as collateral on bonds.
“I particularly like these bonds because you're very much collateralized and yet the yield is very compelling,” said Mark Kiesel, global head of corporate bond portfolios at PIMCO. “Because the airline industry has taken capacity out of the system, and because China and the emerging markets are booming, the demand for aircraft has been rising.”
Investors are scouring credit markets for opportunities as the slowing economy fuels demand for fixed-income securities, sending yields on investment-grade corporate debt to a record low 3.74% this week. Orders for durable goods in the U.S. increased less than forecast in July, and sales of new homes unexpectedly dropped, increasing the risk of a renewed recession in the world's largest economy.
While airline enhanced equipment trust certificates have rallied, “there's still some meat on the bone,” said Tad Rivelle, head of fixed-income investment at TCW. “We do like the asset class quite a bit.”