FIXED-INCOME INVESTORS are no doubt regretting their
unbridled enthusiasm for corporate debt since 1999 but the effect
of credit volatility on the appeal of government bonds has been
complex.
Economic weakness has damaged claims that deficits would soon
disappear, and government borrowing with them. Germany and
Portugal, for example, are now in danger of passing the 3%
debt-to-GDP ceiling set out in the Maastricht agreements.
Technical factors have been narrowing spreads between eurozone
governments over the year. However, when these pass, investors
might start differentiating between different government issuers
more than ever before, as the gap widens between countries with
stable credit fundamentals and those without.
Exceptional levels of corporate default and scandals such as Enron
have emphasized the dangers of taking on credit risk to everyone.
Many of last year's star corporate and high-yield issuers have
disappeared, leaving investors nursing big losses. The flight to
quality in the wake of...
