HSBC fund eyes fresh investment grade demand

Thu Jan 21, 2010 9:19am EST

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* Says demand still there despite strong 2009

* Expects inflows of above $100 million in a year

By Cecilia Valente

LONDON, Jan 21 (Reuters) - HSBC (HSBA.L) is launching a new investment grade corporate bond fund, seeking to tap demand from latecomers to a sector which saw dramatic returns last year.

The HSBC GIF Global Core Credit Bond will be run by the bank's specialist active management arm, Halbis, under chief investment officer for fixed income Xavier Baraton.

Baraton said on Thursday that although the price of bonds has risen since the beginning of the rally last March, there was still a premium for investors willing to enter the market now.

"Furthermore, company fundamentals have been less depressed than anticipated which can be illustrated by profitability or cash flow-to-debt dynamics."

He said current market prices imply annual default rates at 2.2 percent a year over the next five years but added, "this appears to be exaggerated".

Baraton told Reuters he hoped the fund would attract over $100 million in a year. "We think that investors will continue to seek exposure to credit markets."

Both investment grade and high yield credit spreads tightened dramatically in 2009, off historic wides following the collapse of Lehmans. Although further tightening is expected in high yield, there is likely to be much less on offer in investment grade. This would limit returns to investors.

Some commentators see credit being vulnerable to increases in interest rates this year, but Baraton said any rise in base rates tended to coincide with tightening spreads until economies start to overheat, which in his view was still a long way off. "There is more potential for positive momentum and this should also continue to improve the case for global credit from a valuation and technical standpoint," he said.

"Declining liquidity in the market could have some impact on credit as is the case with all risky assets," he said, but he expects central banks to be cautious in their removal of quantitative easing measures.

The fund -- which is open to both retail and institutional investors -- will aim to outperform a bespoke benchmark combining the Merrill Lynch US Corporate 1-10 years index with the ML Euro Corporate (USD Hedged) by 150 basis points a year gross of fees and a 3 percent tracking error, Baraton said. (Additional reporting by Claire Milhench; Editing by Jon Loades-Carter)

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