•Pimco's Kiesel: "Sell High-Yield Debt as `Green Shoots' Become Weeds; Defaults Climb

At least some Analcysts are speaking truthfully.

This Kiesel is VERY sharp. He is personally waiting to buy a house. More deflationary expectations.


-Stabilizing the worst housing market since the Great Depression is “critical” to restarting the U.S. economy, said Kiesel, who sold his Southern California house in 2006 and moved to an apartment because he thought the real estate market would tank. Kiesel said home prices will tumble another 10 percent.

“What this entire crisis has shown everyone is that you can print money like crazy, you can run massive fiscal deficits but the government fiscal stimulus cannot change you or your business because it’s all about animal spirits,” Kiesel said. “People are petrified their house prices will fall.”

Consumers will have the incentive to spend and banks will lend more aggressively once house prices hit bottom, he said.

Kiesel said he hasn’t yet bought a house.

....

http://www.bloomberg.com/apps/news?pid=20601087&sid=aKxIm864uBnc

Pimco’s Kiesel Says Sell Junk Debt as Green Shoots Become Weeds
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By Caroline Salas

July 10 (Bloomberg) -- Pacific Investment Management Co., the manager of the world’s biggest bond fund, says investors should sell high-yield, high-risk debt following a record first half because defaults are climbing.

“The credit markets are very much linked to economic growth and the economy is going to be very weak for a while,” Mark Kiesel, global head of corporate bond portfolios at Pimco, said in an interview from Newport Beach, California.

Investors should sell high-yield, high-risk bonds as defaults rise amid U.S. economic growth of no more than 2 percent during the next 12 months, Kiesel said. Fitch Ratings predicted this week that the U.S. high-yield default rate may reach a record 18 percent this year, from 9.5 percent in June.

“Everyone’s talking about ‘green shoots’ and the reality is we’re in a world where you’re talking about 1 to 2 percent real gross domestic product growth over the next year,” said Kiesel, whose firm manages $250 billion in corporate bonds. “We think some of these green shoots are going to turn to weeds.”

Junk bonds have returned 29.6 percent in 2009, on pace for a record year, according to Merrill Lynch & Co. index data. The extra yield, or spread, investors demand to own the debt instead of similar-maturity Treasuries has narrowed to 10.84 percentage points, from 18.12 percentage points at year-end, Merrill data show.

‘Choppy Waters’

“Credit is still not re-circulating,” Kiesel said. “You’re still talking about 10 to 12 percent financing costs. It’s very difficult for some of these companies to survive with that wide a gap between their profit rate and their financing costs.”

Investment-grade bonds, those ranked at least Baa3 by Moody’s Investors Service and BBB- and higher by Standard & Poor’s, offer better value than junk, Kiesel said. Investment- grade corporate bonds have returned 10.9 percent in 2009, on pace for their best year since 1985, according to Merrill Lynch.

“Investment-grade is going to outperform high yield in the second half,” Kiesel said. “The first half was about just being long credit risk. The second half is really what we call ‘choppy waters.’”

High-yield debt “isn’t giving you any excess compensation value versus what you’re going to need to be protected,” Kiesel said. “You better be getting a spread of about a thousand over Treasuries to compensate you for the current default rate and recovery rate.”

Kiesel, who recommended investors buy corporate bonds at the end of last year, said he expects investment-grade debt to return about 8 percent over the next 12 months. Investment-grade bond spreads have narrowed to 3.31 percentage points from 6.04 percentage points at the end of 2008, Merrill data show.

Bonds of bank, pipeline, utility, telecommunications, cable and healthcare companies are attractive because they have low default risk, he said.

‘Critical’ Housing Market

“The investment-grade market is significantly overcompensating you for default risk,” Kiesel said. “Investment-grade spreads will remain where they are and possibly tighten some. You’re almost doubling Treasury yields now by owning investment-grade credit.”

Stabilizing the worst housing market since the Great Depression is “critical” to restarting the U.S. economy, said Kiesel, who sold his Southern California house in 2006 and moved to an apartment because he thought the real estate market would tank. Kiesel said home prices will tumble another 10 percent.

“What this entire crisis has shown everyone is that you can print money like crazy, you can run massive fiscal deficits but the government fiscal stimulus cannot change you or your business because it’s all about animal spirits,” Kiesel said. “People are petrified their house prices will fall.”

Consumers will have the incentive to spend and banks will lend more aggressively once house prices hit bottom, he said.

Kiesel said he hasn’t yet bought a house.

To contact the reporter on this story: Caroline Salas in New York at csalas1@bloomberg.net
Last Updated: July 10, 2009 11:22 EDT