Pimco Prepared to Reduce Emerging-Market Corporate Debt on China

Pacific Investment Management Co., manager of the world’s biggest mutual fund, is prepared to cut its holdings of emerging-market corporate debt next year on concern a flood of new sales and further economic slowdown in China will put an end to a 12-month rally in the securities.

China’s gross domestic product will expand 7.7 percent this year, according to the median estimate of economists surveyed by Bloomberg, the slowest pace since 1999. Photographer: Keith Bedford/Bloomberg

The plunge in yields to a record 4.73 percent since the Federal Reserve unveiled a third round of asset purchases known as quantitative easing in September means some corporate bond prices don’t accurately reflect the chances of further economic deterioration in Asia or Europe, said Brigitte Posch, who helps manage about $92 billion in emerging-market corporate bonds for Newport Beach, California-based Pimco.

“The rally will probably continue until the end of the year, but the market is starting to get weaker,” Posch said in an interview in Rio de Janeiro on Oct. 22. “At the beginning of next year, depending where the credit spreads are, I will probably be increasing my underweights. If we have two more months of this type of rally, I’d rather be more defensive.”

The average yield on emerging-market corporate bonds fell 155 basis points, or 1.55 percentage point, this year to a record low on Oct. 19, according to the JPMorgan Chase & Co. CEMBI gauge. The average yield for U.S. investment-grade debt declined 96 basis points in that period to 2.73 percent, according to data compiled by Bank of America.

An underweight allocation means owning less of a security or sector than is usually held in a benchmark portfolio.

Via – Bloomberg

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