Deutsche Bank Loves Bonds – US-FOREX.US
Because of fear or prudence Americans are stashing more of their money away, spurring fears that the new habit will drag on economic growth and make it harder to emerge from the recession. Philip Condon, head of municipal bonds at Deutsche Bank’s DWS Investments, looks at the trend differently. “Where’s it all going to go?” Condon asked at a press briefing on Tuesday. “The money has to go somewhere.”The cash Americans put aside could give bonds a lift, he said. Compared to other investments, bonds look appealing. Retail investors will likely remain wary of stocks and real estate, the investments that burned them in 2008. Those holding tax-free municipal bonds have little to fear from higher capital gains taxes. Outside of some Treasury securities, bonds offer more yield than cash sitting in a savings account. Condon and other members of DWS Investments, which manages 112.5 billion in retail and retirement assets, gave a cautiously optimistic overview of the fixed-income market. Would California miss a bond payment? Very doubtful, Condon said. Would a rising default rate punish the corporate high yield market? Don’t count on it, said Gary Sullivan, head of high yield bond portfolio management. The rate will rise, he said, but not as high as 14%, what Standard & Poor’s expects by March of next year .
Should investors fear inflation? “I’m not sure,” said William Chepolis, head of retail mortgage backed securities. High unemployment and a pullback in lending would restrain rising prices, he said. The Treasury market currently implies annual inflation of 1.79%, an ideal rate for many economists. Then again, market predictions are almost always wrong, said Matthew MacDonald, senior portfolio manager for retail mortgage-backed securities.
Inflation could be a problem, Condon said. “Or it could be perceived as a problem.”
Sullivan said he still sees high-yield corporate bonds to buy, even after the market has climbed 29.5% this year. He holds bonds in hospital chain HCA and likes the outlook for health-care cable and telecom debt. He favors bonds rated B and BB, near the top of the junk range, which still offer strong yields. Lower-rated credits, especially CCCs, are the most likely to default. But he’s still willing to pick through the CCC pile.Meanwhile, investors are waiting to see if CIT Group
will be saved from default by a government rescue. Investors who believe the Deutsche bank’s strong bond thesis but still want the liquidity of stocks might look to the potential underwriters of all this new debt. Meredith Whitney says that Goldman Sachs
will get the lionshare . JPMorgan Chase
has also been climbing the league tables, followed by Morgan Stanley
. .
Information from Reuters is included in this report.