Investors will have many options to choose from, but analysts urge caution
Bond investors may be spoilt for choice in the final quarter of this year as many new issuers come to the market to raise fresh capital or roll over expensive short-term debt into longer-term paper.
But in the volatile market investors should proceed with more than usual caution, analysts warned. And the yield-enhancing bonds of emerging market issuers that have so far been in favour among Asian investors could be jettisoned as portfolios are rebalanced.
Much of the new paper due to be issued will be from banks. And, in a recent report, the IMF noted that banks around the world were 'currently adjusting the structure of their funding in response to the global financial turmoil by increasing liquidity and lengthening the maturity of their funding'. But in the present volatile market, this process had also thrown into sharper focus the rollover risks associated with banks' short-term debt. Fixed-income investors faced a delicate balancing act when repositioning their portfolios, said Norman Villamin, head of research and strategy investments (Asia-Pacific), at Citi Global Wealth Management.
'As of September 19, Moody's triple-A bond spreads were trading on a very wide spread of around 200 basis points above US 10-year debt, while BAA corporate bonds were trading at spreads of up to 370 basis points above treasuries. These are levels we last witnessed at the peak of the corporate debt scandals during the bursting of the technology bubble in 2001-02 and then during the US recession of 1980-82.
'What this is telling us is that the market is asking to be paid a substantial premium for the increased risk of default by borrowers. And in an environment where there is a large amount of debt to be rolled over, this may preclude some people from being able to roll over that debt,' he said.
In this respect the bond market had found itself in the same situation as equity markets where investors were uneasy that banks would fail in their bids to raise new equity with damaging consequences for their share prices. The new bond issues present investors with a chance to enhance the returns on their bond portfolios, but it also raises concerns that some borrowers might fail to raise fresh capital.
