Widening credit spreads in the domestic corporate bond market have prompted one manager to advocate selective long-term buying in the sector, while a major superannuation fund sees better rewards for active credit in offshore markets.

The bonds of high quality companies were trading at yields between 9 and 11 per cent, and blown-out spreads in the bonds of the top 25 investment-grade issuers in the Australian iTraxx index “fully compensated” investors for taking on the risk of holding their debt, according to Justin McCarthy, head of research at FIIG Securities.

Spreads in these companies have moved from 42 basis points on September 20, 2007, to 380 basis points on December 10, 2008, and had “finally resulted in a level of return that is commensurate with risk,” McCarthy said.

For Kumar Palghat, director at Kapstream Capital, the Australian corporate bond market has presented "the opportunity of a generation" due to expansive credit spreads and the likelihood that costs of borrowing will decrease as central banks seem ready to keep lowering interest rates.

However Craig Turnbull, chief investment officer of the NSW Local Government Superannuation Scheme (LGSS), said there were better opportunities for corporate debt managers in overseas markets.

The fund recently allocated its entire domestic fixed income allocation of $600 million to a passive fund run by State Street Global Advisors.

“The feeling was that if we are going to get involved in corporate or high yield debt there were greater opportunities to do that through the global portfolio,” Turnbull said.

According to McCarthy, bonds had become cheaper due to excessive forced-selling in the market.

He said big cuts in the headline interest rates set by central banks had reduced the base lending rate, and the emergence of a “normal” yield curve would reward investors for buying longer-duration debt.

But he warned against investing in companies that would need to refinance within the next 12 to 18 months.

Leave a comment