The interest rate tide has turned in the US, UK, and other regions, but does not signal critical change in the near-term bond market outlook, according to a report released by Standard & Poor’s Ratings Services.
Strengthening economic fundamentals and the steady decline in global default rates have helped to sustain investor risk appetite. Global credit quality continued to moderate in the second quarter of 2004, with a decline in the downgrade ratio driven by a slight deceleration in downgrades and a small uptick in upgrades.
“Positive rating trends are expected to continue as outlooks and CreditWatch listings display a reduction in negative bias,” notes Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group.
Notwithstanding modest corporate spreads, bond issuance activity took a hit in most regions relative to the high levels of 2003 as refinancing demands receded. Even though the issuing environment remains favourable from a historical perspective, the pipeline for new issues will decelerate relative to 2003 as some corporations use internally generated funds for net new financing needs. Principal risks to the outlook include: geopolitical tensions (from Iraq or terrorism-related outbreaks) with related implications for oil prices; unexpected deceleration in Japanese or Chinese holdings of US government securities, which could lead to a backup in Treasury yields; a potentially unruly unwinding of leveraged positions in the US; or a lapse in the still fragile economic upturn (particularly in Europe).