Moody’s, the ratings agency, has forecast continued low default rates for companies that have issued non investment grade debt.
Its 2015 Outlook – Bond Funds: Stable Credit Strength; Buffeted by Market Volatility report suggests that there will not be a sharp deterioration in credit within bond fund portfolios over the coming year, with what it defines as the global speculative grade default rate edging up only slightly from 2.3% currently to 2.7% by the end of 2015.
There are some expectations of default deterioration among issuers rated B3- or lower, Moody’s added. A key challenge will be levels of liquidity in the market, as it this has come down in recent years, leading to higher market volatility, the agency said.
“Investors will need to be more savvy of the cost of buying and selling a security, which has increased significantly in the last few years,”said Soo Shin-Kobberstad, a Moody’s vice president and co-author of the report.
“We expect net inflows in bond funds to remain marginally positive in 2015. However, as risk aversion is increasing, investors may rethink their asset allocation and shift out of long-duration bond funds and into those with flexible mandates and shorter durations, which will better insulate portfolios from an interest rate rise. Investors, such as pension funds and insurance companies, will continue to rely on fixed income investments to provide reliable income and steady returns, even in the face of higher interest rates,” added Marina Cremonese, assistant vice president and co-author of the report.
Short term bond funds will see inflows affected by new regulations in the US and EU impacting money market funds. Investors in these funds are likely to shift portions of their cash balances to alternative liquidity products, and short duration bond funds will benefit from this trend, the report’s authors suggests.
The full report is available at www.moodys.com.