Pimco invests in European banks in spite of market fears
Pacific Investment Management Co. sees a gold mine where others are afraid of traps.
The management company invests in risky bonds of European banks. She took part in the placement of senior bonds faced with difficulties of Deutsche Bank AG this month and, according to available data, concentrated in her hands the maximum volume of debt securities of European banks, which are included in the additional capital of the first level.
These bonds, the so-called AT1, are the first to incur losses during crises. If the bank’s capital adequacy levels fall too low, regulators may prohibit it from paying interest on such bonds, and in case of a crisis, bonds can be converted into shares or written off. Pimco’s investment of $ 10 billion in these securities is three times the volume of similar bonds in the portfolio of Invesco Ltd. and five times the investment of the giant of the debt market BlackRock Inc, according to data in the terminal Bloomberg.
“We are opening significant positions when the degree of confidence is high,” said Philippe Baudero, head of financial research at Pimco in London. According to him, the risks of many AT1 bonds and senior bonds of Deutsche Bank, whose issue volume amounted to $ 4.5 billion, are exaggerated, and this can explain such a high yield of securities in comparison with the debt of non-financial companies.
Pimco expects that the problems of the weakest banks in Europe will not spread to the financial system as a whole, and the most risky banking bonds will be a “quiet haven” even if the situation on the markets worsens. Other investors do not risk flirting with such bonds, after the securities themselves and related assets fell by more than 10 percent at the beginning of the year. Then investors were worried about financial results of banks, and regulators had questions about how conditional convertible bonds will behave during the crisis.