Two competing factors overshadow the future direction of the corporate and government debt markets, ...
Two competing factors overshadow the future direction of the corporate and government debt markets, the likelihood of interest rate rises and the continuing underperformance of equities.
Denis Gould, a fund manager for Axa Investment Managers UK, says: 'It is very much range trading and there is a two-way pull. If stock markets affect confidence and world economies change, both could pull in the same direction.'
On one side, he says, most economies, including the UK, US and Europe, are doing well, which is likely to lead to rates needing to be increased. On the other, stock markets are weak and this is causing a movement of investments from equities to bonds, particularly by insurance companies.
Bond markets have been performing well but the forces working against them have subdued that performance, according to Gould. The Axa house view is that economies will continue to be strong, driving up interest rates and leading to slightly higher yields.
This is true across fixed interest markets, including Japan, where yields have been very low.
Gould is more positive about corporate bonds than government bonds as he believes economies will continue to perform well.
Laurence Mutkin, head of fixed interest strategy at Threadneedle, is also positive on corporate bonds but believes the market is increasingly polarised between robust and struggling companies.
Mutkin said: 'It has been a poor month for most corporations, which is not surprising given stock market volatility.'
Investors must be wary of buying the wrong corporate bond, as highlighted by the Enron scandal, but, looking ahead over the next six months, Mutkin expects low inflation and easy monetary policy to continue. The corporate bond market will continue to be subject to pressure, with the economic environment stressful for business, he says, but low inflation will mean corporate debt is not eroded.
He believes the companies that are currently robust and performing well will continue to perform strongly, while those that are facing difficulties could face more problems still.
The point is echoed by Craig MacDonald, investment director of fixed interest at Standard Life Investments. He says: 'Corporate bonds continue to perform strongly as an asset class. However, individual portfolios are still at risk from a small but significant number of blow out credits whose losses are hard to offset by the smaller gains available elsewhere in investment grade credit.
'Avoiding the next Tyco, WorldCom, and other fallen angels is always easy in hindsight, much harder in practice. However, a few general patterns can be seen, starting with a sharpened focus on a company´s liquidity.
'Liquidity crunches are behind many spread blow outs and defaults, and companies with market or funding sensitive activities ' such as trading or finance companies, especially those without a strong balance sheet or regulatory regime to protect them ' have been particularly vulnerable. Sheer size, once seen as a factor that slowed decline, seems to have accelerated liquidity problems.'
Inflation remains low.
Interest rates unlikely to rise quickly.
Equity markets set to continue to struggle.
Many corporates sstruggling.
Conditions for corporate remain poor
Portfolios at risk from poor stock picking.
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