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Junk Bond Limit Near for Pension Fund That Doubled Exposure 

October 11, 2016

Ruth Liew, Bloomberg

Australia’s second-biggest pension fund manager is reaching the limits of its appetite for corporate credit.

MLC, a unit of National Australia Bank Ltd. that oversees about A$20 billion ($15 billion) in fixed-income assets for retirement savers, doesn’t want to increase credit risk further after doubling its holdings of junk-rated debt to about 10 percent over the past 12 to 18 months, said Stuart Piper, the manager’s Sydney-based head of fixed income. The portfolio’s corporate credit holdings have risen to about three-quarters of the fixed-income total from around half, he said.

Extraordinary monetary easing from Europe to Japan has weighed on yields, forcing investors worldwide to move away from the safest assets to generate income. That’s driven global junk bond returns of 15 percent in 2016, putting them on track for their strongest year since 2012, according to a Bloomberg Barclays index. And while speculative-grade yields are near a two-year low, S&P Global Ratings data shows corporate defaults are up 55 percent this year.

“We can load up on non-investment grade credit, but if the equity markets really tanked, instead of our bond portfolio rallying, our non-investment grade would probably tank with it, which doesn’t provide great diversification,” Piper said in an interview last week in Sydney. Read more

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