PIMCO Buys Citigroup Bonds
Kurt Brouwer February 12th, 2008
Bill Gross and the corporate bond team at Pimco are buying bank bonds because they believe the bad news on banks has been overdone [emphasis added below]:
Pimco Shows Alwaleed Isn’t Only One In Love With Citi (Bloomberg, February 12, 2008, Caroline Salas)
“…Pacific Investment Management Co., manager of the world’s largest fixed-income fund, and Calvert Asset Management Co. said Citigroup and Bank of America Corp. are attractive because yields on U.S. bank bonds are near record highs relative to Treasuries. Alwaleed, the biggest shareholder in New York-based Citigroup, bought more of the bank’s stock even as the Standard & Poor’s 500 Financials Index fell 9.1 percent this year…
The reference to Alwaleed is to a Saudi investor, Prince Alwaleed, who bought a large equity stake in Citigroup back in the 1990s during a previous crisis. The fact that he is adding to his position now is also significant in that he is known as a long-term investor with an eye for value.
…”The fact that the banking sector has attracted fresh capital in the last couple of months is huge,” said Mark Kiesel, an executive vice president at Pimco who oversees $158 billion of corporate bonds from Newport Beach, California. “We’ve been playing defense for the better part of two years, and the question we’ve been asking ourselves is when to go on offense. In the banking sector, we’ve started to do that.”
Buying Bank Debt
Pimco has been buying new issues from financial firms because the market is “too bearish,” Kiesel said in an interview Feb. 5. Relative to benchmark indexes, bank bonds represent a bigger portion of Pimco’s holdings, he said. On Jan. 22, Bill Gross, manager of the Pimco Total Return Fund, said Citigroup, Bank of America and Wachovia Corp. were appealing.
Banks account for about half of the $2.3 trillion of securities in Merrill’s investment-grade corporate bond index. Yields reached 272 basis points more than Treasuries on Jan. 23, the widest spread since at least 1996, after delinquencies on loans to the riskiest subprime homeowners triggered widespread writedowns. Last year the gap was as small as 76 basis points in January, and during the last decade it averaged about 103 points. Spreads ended yesterday at 268 basis points…”
The folks at Pimco (see PIMCO & Bill Gross Call For 3% Fed Funds Rate) know how to crunch numbers and they realized that the yields on debt from Citigroup and other major bank bonds were too appealing to pass up. It may be hard for some to understand the reasoning because there is more trouble to come at these banks — that is, the writedowns of assets are not over.
However, I suspect they believe that Citigroup is a global brand with great value and staying power (see Despite Writeoffs, Major Banks Made Money In 2007). Therefore, these bonds that have record yields should turn out to be excellent investments. Mark Kiesel’s comment that it was time to go on offense was revealing. I cannot read his mind, but I suspect he means that the values in these bonds are so compelling that they far outweigh the risks that remain at work in the credit markets.
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