By Steven Levine
NEW YORK (MNI) – Weak U.S. economic data, heightened concerns about
a resolution to the Greece’s sovereign debt woes, and the risk of an oil
price shock are among the scenarios that analysts warn could pose a
threat to the investment-grade corporate bond market.
On the other hand, domestic and global uncertainties such as;
European peripheral sovereign debt issues, Middle East and North African
regional volatility, as well as Japan’s recent natural disasters do not
seem to have had a profound impact on that market.
John Bender, head of U.S. Fixed Income at Legal & General
Investment Management America, a Chicago-based investment adviser, told
Market News International that certain risk scenarios could threaten the
apparent impervious nature of investment-grade corporate bonds.
“If we have an oil shock, if we go to $130 to $150 per barrel,” he
said, “it would weaken an already disappointing recovery.”
Another scenario would be a “renewed drop in housing prices by 10
percent”, which would “affect bank earnings and credit quality,” he
said.
Additionally, if there was an accelerated default in Greece, which
could not be contained, and EU finance ministers were “unsuccessful in
containing the spread of fear throughout Europe, the banking system
would experience a global effect,” Bender said.
Any of these conditions, which would be a “significantly different
risk scenario” than the current state of events, or any combination of
these scenarios would generally spark a “negative push on the economy
and affect corporate spreads,” he said.
Risky assets such as corporate bonds are “more dependent on the
fundamental performance of the economy than on QE2″, Bender said, and
hinge on factors such as those scenarios described above, as well as
issues such as “the U.S. debt ceiling and a long-term fiscal
resolution.”
He observed that from a micro-economic standpoint, strength in the
corporate sector was demonstrated in the “very good” first quarter
corporate earnings results, which were “at or near cycle highs.”
And although the pace of improvements has slowed, banks have higher
capital ratios, higher liquidity ratios and lower leverage ratios,
Bender noted.
But although banks have “kept their commitment to lower leverage
ratios”, Bender said Greece’s sovereign difficulties and Moody’s
warnings on the French banks are “in the forefront” of some investors’
minds, and “they are trading poorly” on more macro-economic issues such
as sovereign and regulatory risks.
In a relative comparison of investment-grade corporate bond
performance by sector, Bender said that banks and financials are
“underperforming” along with cyclicals and telecommunications companies.
He observed that the “outperforming investment-grade corporates are
in the taxable muni space, electrical utilities and higher quality
industrials with a rating of ‘AA'” or above.
Also, in the sovereign space, Brazil and Mexico were viewed by
Bender as having “stronger growth” due in part to factors such as
“higher commodity prices” and that “they have not been large issuers of
debt in recent years.”
Over the long-term, investment-grade corporate bond performance
should be “reasonable,” Bender said. But given the hefty supply in the
territory of $100 billion in May, “it will take time for a correction to
run its course.”
Recently, “markets are thin,” Bender said and noted that the summer
season is usually “less active”. He opined that “June will stay light”
given that in “last couple of weeks of the quarter, corporations are
putting together their final numbers.”
“It’s tricky from a regulatory standpoint to issue new bonds”
during this period, he added.
Legal & General Investment Management America specializes in fixed
income and liability driven investment solutions for the U.S.
institutional market. As of December 31, 2010, LGIMA manages over $18
billion in fixed income assets, with an emphasis on credit strategies.
–email: slevine@marketnews.com
** Market News International New York Newsroom: 212-669-6430 **
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