Bond giants retreat from risky debt

Major asset managers are cutting exposure to riskier corporate debt as a multi-year rally is leaving valuations stretched, the Financial Times reports. BlackRock, M&G, and Fidelity International are shifting into higher-rated or government bonds, warning that credit markets now offer little reward for added risk. The rally, which had been fueled by easing trade-war fears and expectations of deeper Fed rate cuts, could be underpricing risk and reflecting an overly optimistic view on the economy

What’s priced in now is a “Goldilocks” scenario of steady growth and falling rates, but BlackRock’s Simon Blundell called it a “risk/reward [that] certainly lends itself to a defensive position in credit markets.”

Spreads at crisis-level lows: Credit spreads in the US and Europe have tightened to about 0.8 percentage points over government debt, down from 1.5 ppts in 2022 and near their lowest since the global financial crisis, dragging down their appeal compared to the safer alternative. “Credit spreads are so tight that there’s almost no ability for them to tighten further,” said Fidelity’s Mike Riddell.

Some cracks are emerging, with spreads edging wider amid renewed US-China trade tensions and the collapse of auto-parts supplier First Brands Group. Several leveraged-loan transactions, including a USD 5.8 bn sale by chemicals maker Nouryon, have been shelved, while prices for weaker loans have slipped.

Risk is mispriced: Some managers warn that credit differentiation has vanished. “Not only is the corporate credit market way too tight, it’s also equivalently tight between companies,” Andrea Seminara of Redhedge said, warning that “idiosyncratic risk [...] is completely unpriced.”

Not everyone is turning bearish: M&G’s Ben Lord said all-in yields remain appealing as US investment-grade bonds offer about 4.8%, though he still favors covered and higher-rated financial bonds — the cost of buying into which “is as low as it’s ever been,” he said.

MARKETS THIS MORNING-

Asian markets dipped this morning, tracking Wall Street losses, though South Korea’s Kospi bucked the trend with a c.1% gain. Wall Street futures also point to a weak open, following a sell-off in shares of regional banks due to concerns over bad loans.

THE CLOSING BELL-

The ADX rose 0.2% yesterday on turnover of AED 1.5 bn. The index is up 7.7% YTD.

In the green: Fujairah Cement Industries (+7.1%), Multiply Group (+6.9%) and Apex Investments (+3.7%).

In the red: Sudatel Telecommunications Group Company (-5.0%), Hayah Ins. Company (-3.5%) and Bank of Sharjah (-3.5%).

Over on the DFM, the index fell 0.2% on turnover of AED 811.7 mn. Meanwhile, Nasdaq Dubai was up 0.6%.