Bloomberg News

‘Too Early’ for Bank Debt as Housing Weakens, Seix’s Keegan Says

August 30, 2011

Aug. 30 (Bloomberg) -- Investors shouldn’t load up on financial bonds even after the worst declines in 30 months because home prices may drop further as the economy slows, said Seix Investment Advisors Inc. Chief Investment Officer Jim Keegan.

“It’s a little early,” said Keeegan, whose firm manages about $27 billion from Upper Saddle River, New Jersey, and reduced its bank bond holdings toward the end of the second quarter. “We’re in the process of re-examining our outlook on housing prices and may take that estimate down even further,” said Keegan, whose $729 million RidgeWorth Total Return Bond Fund has beaten 99 percent of its peers in the past month.

Bank bonds lost 2.4 percent in August, compared with gains of 0.2 percent for industrial company debt, according to Bank of America Merrill Lynch index data. Investors fled from borrowers facing more risk as unemployment holds above 9 percent and U.S. home prices fell 5.9 percent in the second quarter from a year earlier, the biggest decline since 2009.

“We have been of the view, which coming into this year was very much out of consensus, that housing prices would double dip and in fact that is what happened,” said Keegan in a telephone interview on Aug. 25. The firm sold bank bonds and bought “defensive quality non-financials” like pipelines and large industrial companies, he said.

Global Slowdown

The RidgeWorth Total Return Bond Fund gained 1.6 percent in the past month as investment-grade corporate debt lost 0.5 percent. It has beaten 94 percent of its peers this year by returning 6.4 percent.

“We are experiencing at least a global slowdown, which may turn into a global recession, and then you layer on all the bank balance sheet risk, derivative risks, the counterparty risk and the uncertainty associated with that, and it should not be surprising as to what’s causing the concern and uncertainty in the financial sector and the banking sector in particular here,” Keegan said.

Corporate bonds remain attractive outside of bank debt, Keegan said.

“The technicals are favorable for credit in this zero interest rate policy environment and corporate balance sheets are in very good shape,” Keegan said. “You’ve got to be very careful as it relates to the banks in general but the industrial sector is very strong in here as well as the utility sector.”

--With assistance from Shannon D. Harrington in New York. Editors: Pierre Paulden, Sharon L. Lynch

To contact the reporters on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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