Oslo, Norway • The head of debt investment at Norway’s $880 billion sovereign wealth fund, the world’s largest, said a rally in U.S. corporate bonds may be coming to an end.
Looking at "American corporate investment grade bonds, we see that the spread lies around 100 basis points, that is nearly just as low as they were before the financial crisis," Ole Christian Froeseth, head of fixed-income at the oil fund, said in a lecture in Oslo Thursday. "One can argue that there isn’t much juice left in this spread, especially not in relation to where we were during the financial crisis."
The wealth fund, which gets its investment guidelines from Norway’s government, said its corporate bond portfolio returned 2 percent last quarter. Debt issued by companies in the U.S. made a "negative contribution to the relative return," according to the fund.
U.S. high-grade bonds yielded 111 basis points more than similar-maturity government debt yesterday, down from a record 656 basis points at the end of 2008 and 33 basis points from an the all-time low reached in 2005, Bank of America Merrill Lynch index data show.
There’s "still value" as a long-term investor, he said. "But the challenge is that the premium isn’t so big any longer and the question is whether we can find a better time to buy these Corporate bonds in the future."
As the European Central Bank hints it may resort to quantitative easing and the Federal Reserve signals it’s in no hurry to scale back stimulus, investors are struggling to gauge the longer-term effects of unprecedented monetary easing on markets. Record-low borrowing costs are fanning demand for risk at ever lower returns and driving stock markets to record valuations even as their economies flounder.
"It’s early to make any assessments on how bond yields will react and to make any judgments or predictions on the overall market impact," Froeseth said. "The Fed is being very careful in its signals, so this will all take some time. It’s just very difficult to say anything about this right now."
Norway’s wealth fund is mandated to hold about 60 percent in stocks, 35 percent in debt and 5 percent in properties. It returned $31 billion last quarter, equivalent to 3.3 percent, after its investments in energy stocks and emerging markets rose.
The fund is shifting its holdings to capture more of global growth and has steered investments away from Europe as emerging markets in Asia and South America increase their share of the world economy. It has weighted its bond portfolio according to gross domestic product, moving away from a market weighting to avoid nations with growing debt burdens.
Norway generates money for the fund from taxes on oil and gas, ownership of petroleum fields and dividends from its 67 percent stake in Statoil ASA, the country’s largest oil company.
The investor got its first capital infusion in 1996 and has been taking on more risk as it expands, raising its stock portfolio from 40 percent in 2007. The fund first added stocks in 1998, emerging markets in 2000 and real estate in 2011 to boost returns and safeguard wealth.
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