Steady Bond Market Gives Way To Fear of Rising Interest Rates
WALL STREET WEST
Government bonds have had an incredible run, and risk-wary investors who bought them when the stock market was still frenzied at the beginning of 2000 have outperformed stocks by nearly 26 percentage points. But as Newport Beach bond guru Bill Gross of Pacific Investment Management Co. puts it, “The salad days are over.”
Despite a continuing global hangover from the bubble days, trade deficit imbalances and anemic demand from Europe and Japan, government yields worldwide “are close to rock bottom,” Gross said in a speech at the end of March.
So what should bond investors do?
Gross recommends “coupon clipping,” for now, and if inflation takes hold again, “price protection will be the order of tomorrow.” (Bond prices fall as interest rates rise.)
Gross isn’t the only local bond manager with an opinion, even if his are so influential they recently graced the pages of Barron’s in a cover story. AIG Sun America, the Eli-Broad-founded unit of American International Group, has a few suggestions in a first quarter outlook issued by its financial desk. Though clearly concerned about rates, Sun America doesn’t come out and predict they’re going up.
Nevertheless, Sun has these suggestions for investors who buy into the conventional wisdom that interest rates will rise: Buy bonds with maturities less than three years; consider Treasury Inflation Protected Securities (TIPS), which are inflation adjusted; dabble in high yield or “junk” bonds, whose quality could improve with the economy, and look at income-generating alternatives to bonds.
But investors should be picky about which high-yield bonds they purchase, warns Los Angeles-based bond manager Payden & Rygel in its Quarterly Review. Bonds of so-called “fallen angels” companies that issued investment grade debt and then fell to junk status after hitting a rough patch don’t offer the same protection to investors that bonds originally issued as high yield do.
For instance, companies agree to limit stock repurchases or dividends when they issue high-yield debt. “Investors concerned by the lack of bondholder protection should consider waiting for the fallen angel to refinance in the high-yield market, when appropriate covenants will be added to the new bond indenture,” Payden said.
Losing politicians, it seems, can always find a home in high finance. Earlier this month, former state Treasurer Kathleen Brown was named to head the West Coast municipal finance office of Goldman Sachs & Co.
Brown, who will remain based in Los Angeles, was already working at Goldman Sachs as managing director in investment management which essentially means she was managing the money of very wealthy clients. The Democratic nominee for California governor in 1994 has moved far from the public sphere since losing to Pete Wilson.
Like Brown, 2000 Democratic presidential candidate Al Gore also put on a money management hat, joining L.A.-based securities firm Metropolitan West Financial Inc.
Brown’s name will likely aid her in bringing some new business to Goldman.
With county and state budget shortfalls, the market for underwriting municipal bonds is likely to grow dramatically in the next few years. Goldman competes against the two biggest muni underwriters, Citigroup Inc. and J.P. Morgan Chase & Co. Brown, 57, previously worked at Bank of America and the law firm O’Melveny & Myers.
Cooking With Gas
Shares of IMPCO Technologies Inc., the provider of natural gas fuel systems for indoor forklifts and other equipment, finally perked up after a year of poor performance that left its stock at a 52-week low of $1.76 on April 11.
Last week, the Cerritos company reported higher sales and lower operating expenses for the eight-month period ended Dec. 31. Including expenses related to the July 2002 spin-off of its money-losing fuel-cell division, Quantum Technologies, Impco reported a net loss of $28.4 million, compared with a loss of $18.8 million for the like year-earlier period.
However, sales for the remaining business rose slightly, to $46.4 million from $45.7 million, and the loss was less than $1 million after all the expenses related to Quantum were backed out, the company said. (The eight-month rump period resulted from the timing of the spin-off.)
Chairman and Chief Executive Robert M. Stemmler said Impco expects to continue the sales increase this year, due to strengthening markets in Mexico, China and India, and an upturn in industrial markets. The company has been hobbled by low capital spending levels in the U.S. and elsewhere.
In the wake of the upbeat outlook, Impco’s stock rose to $2.55 as of April 17, a 44.8 percent rise in less than one week. The company also garnered a “strong buy” rating from analyst Eric Prouty, who tracks the stock as an analyst at Adams, Harkness, & Hill.
Two California congressmen are trying to ensure that the Justice Department does not negotiate a secret settlement with Credit Lyonnais, the French bank that has been under scrutiny by federal prosecutors in Los Angeles for a decade.
Reps. Doug Ose, R-Sacramento, and Jerry Lewis, R-Redlands, are trying to ensure that the Justice Department does not “bargain away” the claims of up to 300,000 policyholders nationwide by negotiating a settlement without consulting Congress.
Credit Lyonnais, which is partly owned by the French government, allegedly formed a front company in 1991 to illegally acquire the assets of Executive Life Insurance, a bankrupt California life insurer whose failure cost policyholders billions of dollars in lost claims. The deal ended up being a great bargain for Credit Lyonnais, when junk bonds in Executive Life’s portfolio proved to be more valuable than they were thought to be. The California Insurance Department later accused the firm and other defendants of fraud, seeking up to $3 billion.
The lawmakers, eager to capitalize on anti-French sentiment in the wake of the war in Iraq, want to attach language to the Justice Department’s 2004 funding bill that would bar a settlement. Last week, they sent a letter to the House Appropriations Committee accusing Credit Lyonnais of stripping Executive Life of its junk bonds and selling them for a significant profit.
“These individuals and the states have never been reimbursed for their losses, and any private settlement is likely to preclude any recoupment of these losses,” the letter said.