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Corporate bonds
are better value than government bonds as normal conditions return
to the corporate debt market says Jewson Associates.
According to the consultancy firm, support for the corporate market
has come from massive injections of liquidity into the financial
system by central bankers looking to ease the credit crunch.
Tim Brown, director and head of strategy at Jewson Associates, said
that the rescue of Bear Stearns by JP Morgan in March had encouraged
investors to take a less pessimistic view of corporate debt as it
implied that the authorities would not allow a major financial institution
to go bust.
“We expect more normal conditions to return to the corporate
debt market and spreads to fall further. This is not to say that
we think economic growth will be strong, volatility in markets will
decline and spreads go back to their lows; only that a major financial
implosion has become less likely and spreads in the market should
reflect this,” said Brown.
Brown warned, however, that conditions remain challenging: “Even
if spreads do decline, returns from corporate bonds could be negative
as there is a risk, given the inflationary background, that government
bond yields may rise from current levels, dragging corporate bond
yields up with them. While we believe that corporate bonds should
outperform government bonds they both may lag cash.”
- Pensions Age
August 2008
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