Risky credit starts to wobble

John Waples wrote in the Sunday Times (read article here) on a theme we have been discussing for quite some time – ever increasing activism amongst investors. He points to a number of examples. Cadbury Schweppes, ABN, Rentokil & Vodafone have all come under pressure from equity investors of late “to release value and change corporate structure or management.” The message it seems is getting through loud and clear. Only this week we’ve seen ConocoPhillips and Johnson & Johnson approve $15bn & $10bn share buybacks.

Corporate bond markets are now also starting to get the message. I wrote a couple of weeks ago about the lack of confidence in the credit markets, but the situation has since worsened. Despite Moody’s recent default report showing a drop in the global default rate to 1.38% (the lowest for 12 years), and despite there being just one default in Europe this year, the current iTraxx Crossover Index is now trading at all-time wides. In fact, the index which comprises the forty most liquid high yield credits in Europe (see here for an explanation) is currently trading 35% wider than the tightest spreads witnessed in May.

The index has traditionally been positively correlated to the equity markets, however for now at least, this relationship has been cast aside. The path of least resistance continues to be spread widening and with a large pipeline of deals to come to market (especially in the US) the jitters, it seems, are set to continue.


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Stefan Isaacs

Job Title: Deputy CIO Public Fixed Income

Specialist Subjects: Bonds

Likes: Football, travel and the prospect of retirement

Heroes: Sir David Attenborough, Bill Shankly and Theodor Herzl

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