Major Fund Manager Warns Against Corporate Bonds

Bill Gross, manager of the world’s biggest bond fund at Newport Beach-based Pacific Investment Management Co., is recommending that investors avoid corporate bonds “at any cost” amid a weakening economic outlook.

Gross, who oversees more than $200 billion in bond assets, helped push corporate bond prices lower Tuesday--and yields higher--after he warned late Monday in remarks to reporters that the economic environment is increasingly “corporate bond unfriendly.”

He sees a deterioration of corporate bond credit quality leading to higher yields, rising debt defaults “and a decimation of high-yield junk bonds.”

Investors, he said, would be wiser to stick with Treasury bonds and mortgage-backed debt such as Ginnie Mae securities.

The average yield gap, or spread, between higher-rated corporate bonds and benchmark Treasuries has grown more than half a percentage point, to almost 2 percentage points, in recent months.

That reflects investors’ demands for higher corporate bond yields amid rising fears that more companies will have trouble paying their debts as the economy slows.

Xerox Corp., the world’s largest copier company, has seen its bonds plummet in value in recent weeks on rumors that it could file for bankruptcy. The company has denied the rumors.

“Gross’ comments were in line with the concerns in the market,” said Kevin Kennedy, who helps manage $30 billion at SSB Citi Asset Management.

Gross said he didn’t think the chances of the U.S. economy slowing without falling into recession--a so-called soft landing--were particularly good.

“I do lean more toward the hard rather than the soft landing, because interest rates have risen substantially here and elsewhere,” he said.

Gross also said he sees the chances of a Federal Reserve rate cut soon as unlikely, given the risk that a surge in oil prices this year may push prices on other goods and services higher.

Rather than buy company debt, Gross said, investors should stick to Treasuries and bonds from government-sponsored agencies such as Ginnie Mae.