Pimco dumps Australian banks, property bonds as risks escalate...

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    Pimco dumps Australian banks, property bonds as risks escalate
    By Ruth Carson & Andreea Papuc

    15 March 2018 — 8:46am
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    Pacific Investment Management Co., one of the world's largest bond managers, is cutting its investments in Australian bank debt because of lofty valuations. It's also trimming holdings of real estate and retailers' bonds.
    The unwinding of some of its holdings in Australian lenders' debt is the first such move in about five years by the $US1.75 trillion ($2.2 trillion) money manager.
    Pimco is slashing its investments in Australian bank bonds.
    Photo: Karl Hilzinger
    Pimco's reduction of its exposure to notes sold by real estate investment trusts and local retailers reflects concerns that surging personal debt will constrain consumption, according to Aaditya Thakur, senior vice president and portfolio manager in Sydney.
    "The macro fundamentals keep us relatively positive on risk assets, but where we're cautious is the overall valuations in credit which are now getting quite tight," said Thakur, who is cutting some of Pimco's holdings in longer-dated bank debt, noting there wasn't much of a buffer left to "provide protection for any unexpected negative news in the market."
    Higher-yielding company bonds have been the darlings of Australian debt investors in recent years as they sought havens from record-low interest rates. A Bloomberg Barclays index of Australian dollar-denominated corporate bonds gained 27 per cent over the past five years, ahead of the 22 per cent return from Australian government debt.
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    As prices of corporate notes climb and yields decrease, money managers are now looking to re-position their portfolios against a backdrop of rising global interest rates.
    'Isolated blow-ups'

    AMP Capital Investors is on the lookout for opportunities to bet against highly leveraged Australian real-estate companies that have amassed debt in recent years. The era of cheaper money is ending, putting pressure on some companies' ability to repay debt, according to Nader Naeimi, head of dynamic markets at AMP who helps oversee more than $US100 billion.
    "There will be isolated blow-ups," Naeimi said.
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    Pimco favours debt sold by infrastructure and energy companies. The fund manager likes airports because of a pickup in traffic volumes, relatively steady oil prices and the stable Australian dollar. It also likes pipelines and toll roads.
    The oil and energy sectors are also attractive. After a long period of capital investment, companies are reporting improved revenue and earnings, allowing firms to reduce debt, Thakur said.
    Risk assets are vulnerable to correction as valuations approach fair value, Thakur and John Dwyer, vice president and credit research analyst, wrote in a report. "This risk becomes more important as we transition to a period of gradual tightening of monetary policy by global central banks."
    Bloomberg
 
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