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Credit investors fall into a trap

Amid the extreme volatility in financial markets around the world so far this year, one of the biggest surprises has been the strength of the US debt markets. It has been a roaring start to the year. In January over $70 billion of high-grade corporate paper of between two and 30 years' maturity was issued. Short-term interest rate cuts helped create a steeper yield curve, which historically has been good for corporate bonds.

With a further $45 billion following in February, investors absorbed within two months roughly 30% of all last year's primary-market volume. No-one expected this year to start off so well, given the fragile state of the US economy and the problems the California utilities are having. This ought to be an ugly time for credit. Yet, it's the same in the high-yield market, which sprang back to life after nearly two years of trouble. January's issuance alone accounted for 45% of the entire dollar volume in the whole of last year.

Optimistic economists have argued that the extent of the equity markets sell-off in mid-March, which drove leading world indices towards bear market territory, does not appear to be justified by the outlook for the US economy.

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