It’s happening… corporate bond markets are already in the grip of that “massive case of indigestion” that commentators were warning about last month. But the mounting risk aversion to sovereign debt, amid contagion fears over the Greek debt crisis, could be providing a (very mild) panacea.
From Bloomberg on Thursday:
Investment-grade debt sales are drying up and returns on high-yield bonds have turned negative for the year as investors wait to see whether European leaders can contain Greece’s budget crisis.
Borrowers in the US and Europe sold $5.96 billion of high-grade securities this week, the least this year and about 90 percent less than the average $52.9 billion, according to data compiled by Bloomberg. Speculative-grade, or junk, bonds in the US have lost 0.09 percent in 2010 after gaining 1.52 percent in January, Bank of America Merrill Lynch index data show.
While relative borrowing costs in the US remained steady [on Wednesday] and prices to insure against defaults fell, Huntsville, Alabama-based telephone service provider ITC Deltacom Inc canceled a $325 million bond sale, citing “current market conditions.”
But fears over the “Greek factor” in sovereign debt has this week helped narrow the extra yield investors demand to own corporate bonds instead of Treasuries. As Bloomberg reports, that spread narrowed 1bp to 170bps on Wednesday – having widened from this year’s low of 160bps on Jan 14, after narrowing from 443bps a year ago.
Meanwhile, as the FT reported on Wednesday:
European bond investors believe that the worst is still to come for sovereign debt and are more gloomy about the sector than any other fixed income category, according to a survey to be released by Fitch Ratings on Tuesday.
Of 63 of Europe’s top 100 fixed income fund managers surveyed, 70 per cent expect fundamental credit conditions to deteriorate for sovereign debt and 55 per cent forecast that spreads will widen further.
In fact, notes the FT report, the expected performance of sovereign credit “stands in stark contrast to just about every other debt instrument where investors foresee strong improvements in categories such as emerging markets corporate debt and investment grade corporate bonds”.
But in the view of CLSA’s Christopher Wood, investors should be piling into gold, gold, gold – oh and Asian assets or currencies. In his weekly investor newsletter Greed&Fear, Wood says:
A sovereign debt crisis in the West is coming sooner or later though it is probably not right now. This is why the recent correction in gold is an opportunity to buy more bullion and more gold mining shares.
Gold, in Woods’ view, remains the best hedge against the “almost inevitable Western currency debasement which will be the consequence of the increasingly untenable welfare states and related social security systems”.
The next best hedge, he adds, is Asian currencies and Asian assets. While many would broadly agree with his point about gold and even Asian currencies, some may question his confidence in Hong Kong property. However, he reasons, the recent correction is a buying opportunity in relevant stocks while the continuing supply crunch is a “reason to remain fundamentally bullish on Hong Kong residential property”.
As we noted recently, when it comes to Hong Kong (and mainland China) property prices, it really depends on who you want to believe.
Related links:
For corporate bonds, a week is an eternity – FTAlphaville
China: “It’s simply because people are rich now” – FTAlphaville
Faber lashes out, again- FTAlphaville
Gold backwardisation fears revisited – Oh! Oh! – FTAlphaville
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