Yield Opportunity in Bonds (Bloomberg)

Fidelity Debt Director Sees Value in High-Grade Company Bonds

By Tom Kohn and Shelley Smith

Aug. 20 (Bloomberg) -- Investors should buy investment- grade debt because yield premiums over government securities will narrow further this year, said Fidelity International’s Fixed Income Investment Director Gregor Carle.

“There is still reasonable value in investment-grade bonds,” Carle, who helps manage $179.8 billion of assets at Fidelity International, said in an interview in Hong Kong yesterday. “Global broad market spreads for investment-grade debt still have another 100 basis points of tightening to go between now and the end of the year.” Demand for corporate bonds has outstripped supply, driving down the yield premium that investors demand to hold the debt instead of government securities to the lowest in more than a year, according to Merrill Lynch & Co.’s Global Broad Market Corporate Index. The spread has narrowed to an average 233 basis points from a record 511 basis points on March 30, Merrill data show. A basis point is 0.01 percentage point.

Investors have been lured by the best returns since at least 1998, with investment-grade corporate notes handing bondholders 12.5 percent. That’s up from a loss of 4.7 percent last year and a 2.6 percent profit in 2007, according to Merrill Lynch indexes.

Investors are improving their portfolio quality by moving to bonds of stronger companies, as liquidity returns with the recovery, Carle said. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said July 30 that investors should favor debt and stocks of “strong” companies, which he defined as having strong balance sheets and high dividend yields.

“We’ve come a long way very fast but the markets are still pretty fragile and it won’t take a lot to turn sentiment,” Carle said. “We are still going to see significant defaults.”

Still, he said buying opportunities remain for high-yield debt, though investors should thoroughly research individual companies. High-yield, or junk, bonds are rated below BBB- by Standard & Poor’s and Baa3 by Moody’s Investors Service.

To contact the reporter for this story: Tom Kohn in Hong Kong at tkohn@bloomberg.net; Shelley Smith in Hong Kong at ssmith118@bloomberg.net

Last Updated: August 19, 2009 23:31 EDT