T. Rowe Price favors riskier bond markets

Mary Miller, director of the Fixed Income Division and vice-president of T. Rowe Price Group, speaks at the Reuters Investment Outlook Summit in New York, December 7, 2009.

NEW YORK (Reuters) - Bond fund managers at T. Rowe Price (TROW.O) are shifting to favor riskier markets like U.S. corporate loans and emerging market debt for 2010, Mary Miller, the head of the firm's fixed income division, said on Monday.

The Baltimore-based firm succeeded in 2009 by avoiding such risky fare in favor of more liquid debt and markets receiving strong government backing. But for next year, T. Rowe sees better values in less liquid areas that didn't receive as much backing, like loans and emerging markets.

"Today, I think the greater opportunities are seen the parts of the market that are not (government) supported," Miller said at the Reuters Investment Summit in New York. "The focus has really shifted."

Emerging markets are growing in appeal because their economies were less hard-hit by the credit crunch and they are best positioned to benefit from the global economic recovery.

"In emerging markets, we see many opportunities and we've been putting more research and resources to work," Miller said, mentioning Mexico, India and Brazil.

The move toward non-U.S. debt is not, however, meant as a play on further declines in the value of the dollar's decline. "We're not in the camp where we're betting against the dollar," she said.

Corporate loans, which trade at floating rates linked to the London interbank offered rate, remain one of the few areas of the U.S. fixed income market that still offer relatively high yields, Miller said. Rising short-term rates next year would push yields on loans even higher.

Investors have been wary of high default rates in the corporate loan market, but Miller says those rates should start heading lower in 2010.

T. Rowe price does not see inflation as a major concern over the next year, Miller said, calling it a "back burner concern." The 10-year Treasury inflation protected security is trading at an implied future inflation rate, the so-called break-even yield, of only about 2 percent, she noted.

"I can't say the market is forecasting a big worry about inflation right now," she said.

T. Rowe has a less favorable outlook toward the mortgage-backed securities market, underweighting the sector in its broadest bond funds, Miller said. Within funds that must invest in mortgages, the firm is favoring the parts of the market that received relatively less government support over the past year, such as commercial mortgage-backed securities.

Tougher standards for refinancing home mortgages have also made higher-coupon residential mortgage securities relatively more appealing, she said.

Miller isn't as bearish on the Treasury market as some fund managers. With expectations of economic growth of about 2 percent in 2010 and inflation of about 2 percent, Miller said the yield on the 10-year Treasury note was "not way out of the neighborhood." Though not expecting a major rally, she still sees "room for upside."

Miller, a former manager of municipal bond funds, said tax-exempt debt remained attractive for investors in higher tax brackets despite concerns about the deteriorating finances of many states. "It's a pretty high-quality sector," she said. "I still think municipals are pretty attractive for taxable investors if you look at after-tax returns."

(Reporting by Aaron Pressman; Editing by Leslie Adler)