UK - Credit Suisse Asset Management is urging pension funds to stick to quality bond markets, despite the temptation to seek higher yields in the current climate.
As equity markets remain volatile, and economic recovery is still uncertain, investor “obsession” with safety looks likely to last for some time yet, according to Credit Suisse Asset Management.
Analysts believe that quality - or investment grade - bonds remain a safe haven as the high default risk amongst lower grade bonds appears to outweigh the potential rewards of a high yield.
And demand for such bonds from UK institutional investors remains robust.
Outperformance of higher grade bonds is expected to continue for the following reasons:
- Interest rate speculation has gone through a remarkable U-turn over the last few months, on the timing and magnitude of any global interest rate tightening cycle. Expectations for future short term interest rates have fallen in almost every developed market as a result of continued equity and credit spread weakness, and evidence that momentum of recovery in US demand is stalling.
- According to the rating agency Standard & Poor’s, 56 companies defaulted on a total of US$52.1 bn in debt in the three months ended June 2002, a new record high for the value of defaults in one quarter. Most of the defaults, though, are amongst highly indebted issuers rated as speculative grade by the ratings agencies. Whilst the percentage rate of speculative grade companies defaulting is expected by S&P to be 10.19% this year, the expected default rate for investment grade companies is only 0.18%.
- Re-rating of higher yielding bonds does not seem imminent and the difficult period experienced by high yield over the past two years could continue with no immediate appreciation in capital values.
Commenting on the current bond market, Ian Fishwick, head of UK fixed income at CSAM, said: “In such uncertain times, it is wise to avoid too much name specific risk by running well diversified portfolios, diversified by both sector and individual names.
“Within this context, however, it is still important to pick good securities. When it comes to stock picking there is no substitute for detailed credit and relative value analysis.”
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