Advertisement

Pimco expects ECB to buy euro-denominated IG corporate, sovereign debt

By Jennifer Ablan NEW YORK (Reuters) - Bond giant Pacific Investment Management Co said on Friday that it expects the European Central Bank to further expand its balance sheet by buying euro-denominated investment-grade corporate and sovereign bonds. In its 2015 credit outlook report, Mark Kiesel, Pimco's chief investment officer of global credit, said the ECB should stay very accommodative and "European rates will likely be at zero for the foreseeable future, anchoring European duration and generating strong demand for credit and higher income. "The ECB has finally embraced quantitative easing: Purchase programs of covered bonds and asset-backed securities are already underway, and as European inflation remains stubbornly low, we expect that the ECB will further expand its balance sheet by buying euro-denominated IG corporate and sovereign bonds," Kiesel said. Kiesel said emerging-market credit could be volatile in the coming months given weak commodity and oil prices as well as investor anxiety over the beginning of gradual Federal Reserve tightening. Pimco posted a record total outflow of $5.8 billion (4 billion pounds) from its emerging-market funds in the first 11 months of 2014, according to Morningstar data. Pimco's funds have suffered from ill-timed investment bets in Russia, Ukraine, Brazil and Venezuela, along with the ongoing flight by investors from emerging markets and the management shakeup following the dramatic departures of co-founder Bill Gross and Chief Executive Officer Mohamed El-Erian. On Russia, Kiesel said corporate spreads now reflect not only a simple estimation of credit risk, but also the larger geopolitical risk in these largely sanction-able names. "Credits in Russia currently offer 4 times and 5 times the spread compensation of U.S. investment-grade names for the same amount of credit risk, suggesting that Russia could be an interesting opportunity in 2015," he said. Kiesel said Russian triple-B rated corporate spreads are currently at 500 basis points on average, some 40 basis points wider than the average spread on U.S. single-B rated credits. "We expect Russia, China and Brazil to be the key drivers of EM corporate credit performance for 2015, but it bears remembering that the investment opportunity is in the growth of this asset class as a whole," he said. Law firm Girard Gibbs LLP said on Wednesday it is "investigating potential claims on behalf of investors who purchased shares in the Pimco Emerging Markets Bond Fund concerning possible violations of federal and state securities laws. "The fund's investment in Russian bonds has remained significant," it said. (Reporting By Jennifer Ablan; Editing by Chizu Nomiyama and Alan Crosby)