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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Crimson Ghost who wrote (23840)	12/28/2004 11:54:54 AM
From: ild	Respond to of 110194

NEW YORK (Dow Jones)--After a strong running this year, the U.S. corporate bond market faces a number of challenges going into 2005 - challenges that may fundamentally alter the face of the investment landscape. The biggest concern looming ahead is the prospect of two market heavyweights - General Motors Corp. (GM) and Ford Motor Co. (F) - being stripped off their investment-grade ratings. With over $105 billion in corporate bonds outstanding in the Lehman Brothers U.S. Credit Index, a widely tracked performance gauge, these two issuers account for over 5% of this investment-grade index. Their fall to junk would mark a significant change for bond investors. And that's just the event most likely to grab the headlines in the investment- grade market. Bondholders also worry that shareholder-friendly transactions - from stock buybacks to increased dividend payouts - will continue to gather pace in the new year as companies turn away from two years of rebuilding their balance sheets and improving their credit ratings. This year, for example, stock buybacks rose to $224 billion, the highest level since 1998, according to data from Thomson Financial in New York. "Credit quality is transitioning to deteriorating from improving because of a conscious balance-sheet adjustment by companies," said Tim Doubek, corporate bond portfolio manager at American Express Asset Management, with around $100 billion in fixed income assets. "Investors have to be careful to not put too much risk in their portfolios - there's greater potential of a downside when you're paid very little to take on risk." GM and Ford are perhaps the best examples of deteriorating credit quality in the investment-grade arena, though not because of conscious shifts in balance sheet management. The two U.S. auto giants both carry triple-B-minus credit ratings with steady outlooks, teetering dangerously close to speculative-grade ratings. They are battling against weak earnings, poor sales, heavy healthcare and pension funding costs, and stiff competition from Asian manufacturers. The next six to eight months will be key for both, as GM and Ford roll out their new product lines. "The auto sector's lack of ratings flexibility and compromised competitive positions are constant concerns for credit investors," said Edward Marrinan, director of credit strategy at JP Morgan Securities. "It doesn't appear to us that these risks will diminish materially in 2005." A fall from investment-grade ratings for either or both of these companies could wreak havoc on the multitude of investment-grade portfolios that carry GM and Ford paper, but also on the high-yield market, where portfolio managers would face having to add these bonds to their funds to match their benchmarks. "There's a legitimate question of the capability of the high-yield market to absorb such entrants," said one market participant. "A greater concern is how many investors are prone to be forced sellers when there's a bigger widening on spreads." Ring Out The Old, Ring In The New These concerns are adding to the realization that a shift in investment strategy is inevitable - for what worked in 2004 will not necessarily bring in the returns in 2005. "A rising tide lifted all boats this year, but as the tide recedes, some boats are left on the shore," said Kevin Cronin, chief investment officer of fixed income at Putnam Investments, with around $70 billion in fixed-income assets. " This creates a difference between sectors and between individual issuers within sectors." Credit selection is seen as key for 2005 - unlike this year, when investors bulked up on corporate bonds across all sectors, cheered on by the slow but continuous grinding of yield margins. In 2004, yield margins on corporate bonds saw a prolonged and persistent tightening with improving credit fundamentals, as corporations pared down debt and accumulated cash on balance sheets. The option adjusted yield margin on the Lehman Brothers U.S. Credit Index stood at 80 basis points over Treasurys on Dec. 27 - 16 basis points tighter than the 96 basis points spread last December. Also contributing to this tightening was the heavy demand for new paper amid scarce supply - over $321 billion was sold in fixed-rate notes through December - lagging behind the $411 billion sold last year - according to capital markets data provider Thomson Financial. "It will be a bond picker's year where credit selection is key," said Tim Compan, corporate bond portfolio manager at National City Investment Management Co., with around $6 billion in fixed income assets. "The days of loading up on everything are over." Keeping this in mind, a large number of market participants are going into the new year with an underweight position in corporate bonds - meaning they hold less than the benchmark Lehman Brothers U.S. Credit Index - because they expect yield margins to widen from their current historically tight levels. "Bond spreads are looking rather than expensive, considering we are nearer to the end of the economic cycle rather than the beginning," said Ben Pace, chief investment officer at Deutsche Bank Private Wealth Management. "We are waiting for spreads to widen out, as the economy slows down, to pick up some good bargains." And further out on the horizon looms the prospect of some form of privatization of social security, most likely through the setting up private investment accounts. Although the process is expected to be long-winded and the details of the privatization are yet fuzzy, this will be a much discussed topic in 2005, investors said.

To: Crimson Ghost who wrote (23840)	12/31/2004 7:53:49 AM
From: Tommaso	Read Replies (2) \| Respond to of 110194

I do not seriously think the US means to allow any formal debt repudiation, but financial markets in other countries are very uneasy at the "serene" (the word used in France's "Figaro Economique") attitude of our gov't about the dollar's decline. Incidentally, yesterday I saw a small antidollar (and anti-Bush) demonstration on the Boulevard St.-Michel here in Paris. They were scattering fake one-dollar bills that looked pretty real at first, all sticking to the wet sidewalk.