Sovereign investors look more closely at quality
Sovereign issuers are back in fashion. But bond investors worry about deteriorating government finances and rising interest rates as well as corporate credit quality. So sovereigns must work harder than ever on new-issue and liability management programmes.
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.