War and a fatal flu virus have dominated newspaper headlines. Yet most bond analysts agree that whil...
War and a fatal flu virus have dominated newspaper headlines. Yet most bond analysts agree that while the Iraq war dampened economic activity and bond markets worldwide, the Sars virus is a temporary blip that has been sensationalised by newspaper editors.
'It is difficult to quantify what impact Sars has on bond markets,' says David Lloyd, director of fixed income at Henderson in London. 'There are two issues here ' market sentiment and economic activity. Market sentiment is temporary. Economic activity is more persistent.'
According to Lloyd, Sars is just another piece on the downward pressure on global economic activity ' it has an impact on market sentiment which subsequently keeps yields down. 'It's not yet a serious problem. It's just another thing delaying the progression towards global economic recovery.'
'Will one last push from central bankers be necessary to get the economy back on track?' asks CDC Ixis in its market research. 'It seems that central banks at the last G7 meeting are counting on the dispelling of uncertainties to lift the global economy. The ECB, for its part, is looking for a rapid drop in inflation in the short term before it cuts interest rates.' The fund management firm believes that unless manufacturer confidence continues to weaken ' as a result of the war ' Central Banks will probably follow suit this month.
In the US, however, bond analysts are keeping a sharp eye on the Fed and the direction interest rates will take. There has already been talk of a further cut in interest rates, by 15 basis points, from an already 'emergency low' level of 1.75%. According to Lloyd, such action begs the question: what does the Fed know that we do not?
Yet according to CDC Ixis, in a post-war US, the Fed can allow itself the luxury of a final cut in interest rates, as inflation is not considered to be a threat.
'The flexibility of the economy, brought about by the high degree of reactivity, has enabled businesses to restructure their balance sheets. Debt paring is already underway: this is a very good sign which has been reflected in the credit market over the past three months with a steady narrowing of spreads.'
Optimistically, the world's economy still holds promising prospects for corporate bonds, says Lloyd. 'We are reasonably confident that we will avoid a prolonged period of recession worldwide,' he says.
He says that while the bond markets have experienced a protracted period of sluggish growth, deleveraging is underway. So long as the equity markets move towards recovery, these developments bode well for corporate bonds.
The corporate bond market is also benefiting from the fact that government finances are deteriorating at a 'spectacular rate'. The need for governments to borrow more can create extreme aversion among investors, who subsequently seek out alternative fixed income investment options, making the higher risk, higher return corporate bond market more appealing.
'One has to be cautious about it,' says Lloyd. He points out that while US corporate bonds have performed strongly ' outperforming government bonds as well as any other bull market in credit ' the end game may be near. Significant narrowing in credit spreads are surfacing.
Opportunities in Asia are virtually non-existent. The sorry state of the Japanese economy, once the strongest in the world, is naturally not attracting investors to its zero interest rates. And the Sars epidemic in the region isn't helping matters either.
'Asia may now become the main question mark on the economic horizon,' according to CDC Ixis. 'It must now deal with the Sars epidemic after very strong growth in 2002 and early 2003.' CDC considers the implications of Sars can have significant impact of Asian economies.
'If Sars is not rapidly eliminated, its spread could impact on consumer spending and output in China, Asia's growth engine. At best, several weeks of interruption in consumer spending and travel will be bad for the region's economy and therefore for Japan, which exports half its products to Asia.'
Exit fees and conversions
Initial FOC of 0.6%
Former PFS president
Last commission convened in 2002