Fixed income investors shun high yield
Financial institutions hoping to issue securities backed by low doc mortgages and another kind of high-yielding structured product can put those plans on hold. Investors at yesterday's Australian Fixed Income Forum in Sydney were unanimous in setting out conservative investment strategies for their portfolios.Speakers stressed that risks remain, as highlighted by the sovereign debt crisis in Greece, and that in such an environment their preference is for domestic, A-rated credit.The senior credit desk analyst at Nomura, Sonia Baillie, said credit spreads had the potential to come in another 25 to 30 basis points this year but she warned that there would be plenty of "near term" volatility.Baillie identified regulatory reform, sovereign debt default, the Chinese economic imbalance and rising interest rates as risks that would unsettle the market. On the fundamentals, Baillie said the good news was that corporate default rates had peaked, ratings momentum has become positive and bank asset quality was improving.Head of credit at Perpetual, Michael Korber, said investors were unhappy about the lack of depth and diversity in the Australian credit market but, despite that, were concentrating their investments in that sector. However, the lack of diversity in the local market precluded Perpetual from investing in sub-investment grade issues. Korber said: "When you get into sub-investment grade you look for diversification. It's not there."Kapstream Capital managing director Kumar Palghat said the local credit market suffered from concentration risk but, despite this, he had a home country bias. Palghat said that since the financial crisis his view of high yield debt was that it looked more like an equity play than a debt play and did not belong in Kapstream's fixed income portfolios. Other speakers agreed with this view. Pimco Australia head of portfolio management Robert Mead said his focus was on the risk of contagion that might flow from the Greek crisis. He said: "Now is not the time for high yield. We can get double digit yields on high grade credits and investors should welcome that."