Bond Outlook September 23 2009

Just how far removed the current behaviour of financial markets is from historical norms can scarcely be overstressed, and this should be taken into account by investors, not least because ultimately, a return to normal conditions is inevitable:

• low interests rates are making money markets very unattractive
• a whole class of securities, asset-backed bonds, has almost disappeared as securitisation has practically ceased (although signs of a slow rebirth are showing, as recommended by the IMF)
• there are plenty of funds around but they are not reaching industry through bank loans
• corporate bond issuance has substantially taken the place of conventional bank lending

In these circumstances investors are “thrashing around” looking for something, almost anything, to do with their money. Most simply want, as a minimum, a return better than bank interest. This represents not so much an active decision to adopt more risk, but more a move to achieve some sort of positive return. This has at least the following consequences:

• new corporate issues are oversubscribed, even when, for a given rating, they are clearly overpriced.