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Smaller names fill up

As investors cut back on corporate exposure, high-quality issuers are scooping up funding. Smaller ones can satisfy their needs with many bite-size deals rather than a few jumbos.

Smaller fish satisfy needs with bite-sized deals

Nobody is asking any longer what the world will be like without government bonds, a topic that exercised bond investors when the US moved into surplus at the end of the 1990s and European governments embraced fiscal discipline and debt reduction in the run-up to the launch of the euro.

That's all over - the biggest sovereigns are all due to increase their state borrowing substantially this year in the face of deteriorating public finances.

Investors have bought government bonds, despite low yields, in the retreat from corporate bonds and in the hope of benefiting from deflation-fighting rate cuts. But concerns about the quality of some sovereigns are now taking hold.

To take the most recent example, S&P revised its outlook to negative on Italy, the eurozone's biggest issuer, in January, arguing that the government needed to carry out real structural reform rather than continue to rely on one-off solutions such as the securitization of government buildings. Some market participants even question whether Germany can maintain its triple-A rating.

With Europe's three biggest issuers nearing their Maastricht debt to GDP limits and the US government undertaking its latest stimulus package, issuance will rise and concerns about governments' fiscal positions will increase.

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