Prudential Financial Inc.’s Michael Lillard said investors should buy commercial mortgage-backed securities and other bonds that fell on concerns the U.S. Federal Reserve will slow its pace of debt purchases.
The increase in yield provided by CMBS, emerging-market debt, high-yield bonds and bank debt makes those assets particularly attractive, according to Lillard, the chief investment officer at Prudential Fixed Income. Newark, New Jersey-based Prudential, the second-largest U.S. life insurer, has more than $1 trillion under management.
“You’ve seen a big overreaction to the Federal Reserve,” Lillard said at a June 26th event in New York. “We really think it’s a situation where commercial real estate is pretty solid.”
Fixed-income assets have fallen since May 22 when Fed Chairman Ben S. Bernanke told Congress that the Central Bank’s bond purchases may be reduced if the U.S. employment outlook shows sustained improvement. Bernanke said on June 19 that the Fed could begin phasing out bond buying later this year and halt purchases around mid-2014 as long as the economy meets its forecast.
“Yields have overreacted here and they’re too high,” Lillard said. “In our portfolios right now, we’re actually somewhat long duration, and we expect yields to retrace.”
Lillard said he recommends the highest-quality CMBS issues. Investors are demanding 1.2 percentage points more than the benchmark swap rate to buy new CMBS tied to shopping malls, skyscrapers, hotels and apartment buildings, according to data compiled by Bloomberg. That’s up from 72 basis points in February, the narrowest spread since sales revived in 2009. A basis point is 0.01 percentage point.