Pioneer Favours Corporate Bonds, Shuns Government Debt

Wendy Spires

12 February 2009

In the fixed income sphere Pioneer Investments has said it is most bullish about corporate debt, where it has a strong overweight, while it is bearish of US and Japanese government bonds.

Pioneer argues that US Federal debt may spiral as a result of growth stimulus packages and so maintains a strong underweight in US government bonds. The firm is also strongly underweight Japanese government bonds, which it sees as being expensive in both nominal and inflation-adjusted terms.

Pioneer is slightly overweight emerging market bonds, being of the view that these countries are better prepared to deal with the financial crisis due to rich cash reserves and prior fiscal discipline. The strongest of the emerging nations may continue to invest in domestic infrastructure and revive domestic growth, which will eventually benefit emerging market debt issuers, the firm argues.

Pioneer’s overweight in corporate bonds focuses specifically on euro short term bonds of less than two years, along with US/European corporate investment grade and high-yield debt.

In Europe, credit spreads reflect an economy-wide default rate which is consistent with deep recession – a worst case scenario which Pioneer does not believe in. It is therefore slightly overweight European corporate investment grade bond.

A slight overweight is also Pioneer’s position on European corporate high yield as it believes the balance sheets of non-financial European companies are still essentially sound. Current risk aversion, coupled with the expectation of a depression, rather than recession, has created valuations that do not reflect fundamentals, in Pioneer’s view, and it still sees value in select high yield names.

Turning to the US, Pioneer points out that most of the market action in high yield comes from US car manufacturers. These may be suffering amid fears of a global recession, but Pioneer is confident that the quality of its US high yield exposure is sound compared to the risk/reward profile of the asset class.

Pioneer has concluded that current yields for US treasuries and German bonds, can only be justified by the fear of a deep, prolonged downturn along with an imminent period of deflation. However, yields are likely to rise sharply on the back of inflationary pressures, such as zero, or near-zero, interest rates, the firm maintains.

Pioneer believes that credit spreads are not justified by fundamentals and that government debt prices are being driven by investors’ obsessive search for safety. The firm is therefore confident in an approach that favours “risky” assets such as corporate bonds over the safe haven of government debt.