Interesting PIMCO Article on Credit Risk in BBB Corporates

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Theoretical
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Interesting PIMCO Article on Credit Risk in BBB Corporates

Post by Theoretical » Thu Jan 18, 2018 11:57 pm

https://www.pimco.com/en-us/insights/vi ... -bbb-bonds

This article from PIMCO gives me mixed feelings. I like reading various bits and pieces of fund company literature in part because while it's impossible for it to not be self-serving or even self-congratulatory, as this article certainly is, you also get pieces of insight or perspective. In this article's case, I find that I agree with their concern but do not agree with their solution.

Thought 1: It IS very concerning about the increase in leverage attached to BBB industrial bonds discussed in the article. We've seen this game before and it demonstrates at least the possible early-mid-late (who knows) stages of ratings agency "optimism"

Thought 2: I've already been leery of tightening credit spreads and already use what I consider implied/internal leverage with a heavy small value tilt, so it's not like I'm a big fan of credit, but this is yet another problem that comes with the thirst for yield. Less than the BBB, which I wouldn't invest in normally, I'm much more concerned about how A and especially AA bonds are being handled as well as high-grade fallen angel BB debt.

Thought 3: You see a similar issue in the municipal bond market only with AAA ratings coming out of states and municipalities with crushing pension obligations and other high liabilities.

Thought 4: I completely disagree with their premise that "this is a dangerous market" so it shouldn't be indexed..."we'll do a great job." The fact is that even if the corporate market/credit gets crushed like a beer can like in 2008, Total Bond Index investors will do just fine thanks to the treasuries and agency MBSs. Ditto for the CD or Treasury only crowd, at least in the context of a panic or liquidity crunch. Good luck playing the active management game with corporate bonds when Thought 5 is in place.

Thought 5: The article really highlights what I think is a fundamental problem of virtually all active management* save a few genuine weirdos in the fund world which is that bond funds reach for yield and stock or high-risk bond funds take defensive positions contrary to their mandates. At the end of the day, this article says industrial BBBs are a treacherous market, but trust us, we'll find the great deals. To their credit, Total Return (positive) and their Investment Grade Corporate fund (barely negative) did awesome in 2008, but their municipal bond fund sure didn't (-20%). At the end of the day, the problem is that the fund manager has to serve his or her clientele, and with bonds, they want yield over safety.

*I don't count Vanguard's corporate or municipal "active" funds as active but more of supraindexers because they hold many more bonds than the underlying index rather than fewer. Also, to their credit, when they went active (removing non-GNMA CDOs) they did it to reduce risk rather than increase yield. That's very rare.

pkcrafter
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Re: Interesting PIMCO Article on Credit Risk in BBB Corporates

Post by pkcrafter » Fri Jan 19, 2018 10:20 pm

I don't see anything but a sales pitch. Apparently only PIMCO can save us.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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