By Richard Leong and Jennifer Ablan
NEW YORK (Reuters) - The U.S. Federal Reserve's decision not to raise interest rates on Thursday is giving investors a green light to buy bonds on the view that the central bank won't move for some time.
Some of the biggest bond firms won bets that short-to-medium dated U.S. Treasuries and investment-grade corporate bonds would gain if the Fed backed away from its already lukewarm stance to hike interest rates by year-end.
Rick Rieder, chief investment officer of global fixed income at BlackRock (BLK.N), the world's biggest asset manager with $4.7 trillion in assets under management, told Reuters: "I had thought that investment-grade credit had very limited value for the past few years, but some of these spread levels are very attractive right now."
He said he is buying investment-grade corporate credit, particularly in the industrial sector, which is generating increased supply.
With risk premiums on investment-grade corporate bonds - the difference between yields on those bonds and comparable government debt - hovering near their highest in three-and-a-half years, Rieder and other top bond managers expect that spread to narrow in a low-rate and low-inflation climate, enhancing their overall returns.
European bonds are also worth a look, Rieder said.
The Fed's wary global view due to troubles in China and emerging markets might cause the European Central Bank to step up its stimulus in a bid to protect the euro zone economy, strategists said.
Some, such as Doubleline Capital's Jeffrey Gundlach, have been buying U.S. Treasuries, favoring five-year notes, saying "There is not enough global growth to go around and the Fed realizes it."
Gundlach was referring to China's devaluation of its currency in August amid signs that the country's economy – the world's second-largest – is slowing down.
Fed Chairwoman Janet Yellen said Thursday at a press conference following a two-day policy meeting: "Developments that we saw in financial markets in August, in part, reflected concerns that there was downside risk to Chinese economic performance and perhaps concerns about the deftness in which policy makers were addressing those concerns."
Other bond managers including John Bellows at Pasadena, California-based Western Asset Management, which has $453 billion in assets, said he anticipates bigger profits by owning more longer-dated Treasuries, rather than shorter-dated issues, given the tame inflation environment and the likelihood the Fed will eventually raise short-term rates, even if it doesn't happen this year.
"We prefer our duration exposure further out the curve," Bellows said.
Heading into the Fed meeting, short-dated bond yields rose as some investors anticipated a rate increase. The two-year note's yield climbed to 81 basis points, highest in four-and-a-half years.
RIGHT CALL PAYS OFF
Investors put $1.1 billion into Treasuries funds in the week ended Sept. 16, the sixth consecutive week of inflows, according to Lipper, a unit of Thomson Reuters.
Some of the biggest bond firms that anticipated the Fed to leave policy rates near zero on Thursday scored gains, beating rivals who bet on the central bank to raise rates for the first time in nearly a decade.
Dan Ivascyn, Group CIO of bond giant Pimco, told Reuters on Friday that the Newport Beach, Calif.-firm added U.S. Treasuries in various maturities ahead of the Federal Reserve decision this week.
That positioning helped its flagship Pimco Total Return Fund, one of the world's largest bond funds, post a one-week return ended Sept. 17 of 0.26 percent, surpassing 92 percent of their peers.
Barclays' U.S. Aggregate bond index, which is the most widely followed U.S. bond market benchmark, racked up a 0.49 percent gain on Thursday, its biggest one-day rise since early July.
On the same day, the two-year Treasury note yield (US2YT=RR) fell 11 basis points, the steepest one-day decline since December 2010. U.S. investment-grade corporate bonds gained 0.65 percent, its biggest single-day rise since early July, according to an index compiled by Barclays.
With Fed's rate hike up in the air again, BlackRock's Rieder said investors it is paramount for investors to stay nimble as financial markets will remain volatile.
"You have to be more tactical and more flexible," he said.
(Additional reporting by Jessica Toonkel. Editing by David Gaffen and John Pickering)