UK - Corporate bonds will outperform into the year end and overall spreads versus gilts will remain stable, Glasgow-based multi-specialist manager Britannic Asset Management predicts.
Britannic’s head of credit, Chris Bowie (pictured), says while the fundamentals for corporate bonds are good, they are not improving enough to lead to spread tightening.
“If sterling bond spreads widen substantially compared to Euro and Dollar issues from the same company, an arbitrage opportunity will be created and arbitrageurs will exploit that by buying the sterling bonds, selling the Euro or Dollar equivalents and hedging their currency exposure,” Bowie said.
“This should help to stop spreads widening significantly further from here.”
Bowie pointed to PS04/16 as a key factor for the underperformance of credit market this year with credit curves and borrowing costs steepening and rising respectively.
He believes the policy statement has already affected the corporate bond market to a large extent and the bad news has been priced in.
“Default rates have been falling and name-specific events this year have been tied to corporate activity rather than bankruptcy, fraud or default events,” he added.
“In addition, while equity momentum has slowed, earnings are still growing and companies have been increasing their investment spend.
Therefore, it is hard to argue that the fundamental corporate story has worsened enough to lead to the underperformance of credit.”
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