Concerns over global recession jumped to the top of the worry list for investors in corporate bonds as market stress in late 2018 and expectations for further weakness in economic data dent investor confidence, a new poll shows.
Almost a third of credit investors surveyed by Bank of America Merrill Lynch see the risk of a global recession as their top worry, the highest for a single concern since mid 2017.
The results of the survey of 58 BofA clients come on the back of a slew of weak economic data, with Germany, Europe’s biggest economy, only narrowly avoiding a technical recession in the second half of last year. At the same time, growth in China slowed in 2018 to a 28 year low. Next week’s release of fourth-quarter gross domestic product data in the US is expected to show a sharp drop in growth from the highs in the second quarter.
Economic data out of the euro area are expected to remain weak according to survey respondents with half of high-yield investors expecting the single currency bloc to dip into recession.
A bout of market volatility sent spreads on global investment grade bonds rising from around 116 basis points in September to a peak above 162 bps in early January, according to an ICE Data Services index. But as risk sentiment has improved in recent weeks, spreads, or the premium in yield demanded to purchase corporate bonds over ultra-low risk government debt, have eased back to 135 bps.
China stimulus is the key to lifting the eurozone from its current malaise according to 40 per cent of credit investors, the BofA survey showed. Although high-yield investors, who trade corporate bonds deemed to be riskier than investment grade peers, are less convinced this will be the case without higher bank lending.
Meanwhile, with expectations for further Federal Reserve rate rises largely priced out of markets, concerns about rising yields have disappeared. Brexit fatigue was evident with the survey showing only 2 per cent thinking this was newsworthy.
Despite this gloomy picture, “investors have added meaningful risk” this year, BofA said. Overweight positions are “almost back to their post-Lehman average”, the survey showed.
