The Manager's Commentary
As can be seen by the six month graph below, spreads in both the investment grade and non-investment grade corporate bond markets have widened since the middle of January. While the widening has not been severe we think the market is reflecting on how quickly the snap back in spreads has been, despite the forecasted lower corporate default rate by the end of 2010.
Source: Merrill Lynch, February 5, 2010.
What is also likely contributing to the reassessment of risk is the increasing debt load at certain European and emerging market countries or “STUPID”s (Spain, Turkey, UK, Portugal, Italy, and Dubai). The rising debt loads at these countries is increasing the probability of a default by one of these countries, which may be perceived to have a knock on effect on corporate credit, and, most certainly, on major equity markets.
Despite this STUPID sovereign risk and the expected increased supply of government debt and yields from these countries (including the US), the same cannot be said of corporate bonds. Non-financial corporate bond issuance in 2010 is expected to be much lower than it has been over the past four years. This diminished supply should technically, as well as fundamentally, support prices, as it would suggest a de-leveraging trend.
Matt Shandro
January 31st, 2010