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Bond group CIO: energy valuations are ‘mouth-watering’

Bond group CIO: energy valuations are ‘mouth-watering’

The aggressive sell-off seen in the energy sector over the past six months has created a host of value opportunities for high yield investors, Western Asset’s chief investment officer has said.

In an investor update, Ken Leech, who is also a named manager on several funds at the Legg Mason affiliate, said the indiscriminate sell-off meant investors could now cherry-pick under-priced bonds.

‘The valuations on some of the companies are mouth-watering, especially as they have the ability to cut production and costs, allowing them to weather the oil price collapse better than some fear,’ he said.

‘One change this year has been energy bonds in the high yield space, and the companies we are buying can withstand $50 oil for five more years,’ he said.

Leech’s comments came shortly before the latest drop in oil prices on July 27, which saw a fourth month low hit with the price-per-barrel slipping below $50. However, Leech remained optimistic about the long-term potential.

‘Because of the low sovereign yield levels, and our increased optimism about growth, we believe risk assets may outperform sovereign bonds,’ he said.

Elsewhere, Leech said long-dated US treasuries continue to offer value in his opinion. ‘The US yield curve has steepened as 30-year treasury yields have gone up.’

‘It means we have falling yields in the short-term caused by weak data, but rising 30-year yields. It has left us with almost a 100 basis points difference between 10-year and 30-year treasuries currently, which is extraordinarily rare, and this curve may flatten going forward as the yield increase has created some value.’

High yield credit currently makes up 19.79% of the $4.2 billion Legg Mason Western Asset Macro Opportunities Bond fund, while the largest exposure is to non-US dollar debt, which is 43% of the fund at the end of June 2015.

The Legg Mason WA Macro Opportunities Bond fund returned 2% over the 12 months to the end of June 2015. This compares to a return of 0.73% by the average manager in the Citywire – Bond Strategies sector over the same period.

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