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Dicing with the bond bubble

Investors are still piling into US corporate bonds but there’s little sign of improved credit quality to justify this desperate enthusiasm. What’s more, interest rates must rise sooner or later. • Kathryn Tully reports

TALK TO ANYONE who works in US debt capital markets and you will be told that a substantial bond market correction is on the way - even that it's well overdue. The only debate is about precise timing and how long the investor casualty list will be. But looking at just the corporate bond market over the past 18 months, some bankers argue that the fallout happened a long time ago.

Some say that it happened - in the investment-grade market at least - when cable assets plummeted to trade at between 50 cents and 60 cents on the dollar last year. Or indeed when established issuers such as Ford Credit saw their dollar bonds trading on spreads north of 600 basis points over treasuries in the face of unprecedented investor skittishness last October. "Are we going to have a healthy correction? Yes. But it's not going to be anything as bad as we've already had," is one banker's weary take on the market.

This sense that the worst has already happened in the corporate bond market has sustained it in 2003 in the face of the twin threats of mediocre corporate credit quality and a potential rise in interest rates.

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