By Matthew Goldstein and Jennifer Ablan
Big money managers do not always agree–that’s what makes a market–but if there was one consensus coming out of our just concluded Reuters Investment Outlook Summit, it’s that next year will probably be another bang up one for the bond market.
Now the credit markets will have a tough time repeating the kind of numbers put up this year, especially with the Federal Reserve doing its darndest to push down borrowing costs and yields by buying mortgage backed securities and even Treasuries. Speaker after speaker who joined us in New York said “junk” bonds, corporate debt, mortgage- and commercial-backed securities and even Treasuries “on a trading basis” should do well for no other reason than credit markets still aren’t showing anything close to the kind of froth we saw in the run-up to the financial crisis. The sense is that it may be another 2 or 3 years before we see excesses build up in the system again.
Oh sure, there are exceptions such as, bonds being sold by companies to pay special dividends to their private equity backers (several speakers said to avoid these). Other guests also are wary of the junk bond market, noting with yields coming down the risk to reward premium isn’t looking as good as it did earlier this year. And at least one speaker said he would avoid mortgage REITS because there’s too much leverage baked into their holdings.
For the most part, nearly all of our guests said corporate credits including the junk bond market will turn in solid—not spectacular—performance in 2013, noting with yields coming down the risk-to-reward premium isn’t providing the kind of juice as it did earlier this year to produce returns.
As for stocks, the verdict is like every year–cautiously optimistic. Some say the stock market will do OK next year as the politicos in D.C. can get their act together and really deal with taxes and budget cuts (a big if). Other says if the economy continues to revive, stocks should post decent single-digit returns.