Economy

Heat being turned up in corporate bond market

As global economic risks continue to run high, there is increasing concern about the quality of debt in the corporate bond market.

Global credit ratings agencies have been keeping a close eye on trillions of dollars locked up in corporate bonds, amid heightened concerns that many were at risk of being marked down to junk bond status.

While the danger had been lurking for some time, the International Monetary Fund warned last week that 40 percent of all corporate debt in major economies could be considered "at risk" in another global downturn -- rising to $US19 trillion ($NZ29.6 trillion), which would exceed risk levels seen during the 2008 global financial crisis.

A slip below the minimum investment grade rating of BBB-minus would require many institutional investors to sell their holdings, including big pension fund investors like the New Zealand Super Fund.

The SuperFund has a total of $44 billion of funds invested in a diversified international portfolio, including about $4b in bonds.

About a billion is in investment grade corporate bonds, with $340 million in bonds rated BBB+ or worse.

Only $58m is currently in bonds with a rating of Triple-B-minus, which represents just 1.3 percent of its total funds invested.

Super Fund chief economist Mike Frith said the risk was real, but was tied to the health of the United States economy, which was doing okay at the moment.

"If you did actually see a big deterioration in the global economy, or a US-based deterioration, for example, if US corporate profitability collapsed then there is a real chance that ratings would change, and you would see some of those bonds drop out of those investment grade assets."

However, Frith said many large corporations had locked in long-term low interest rates, which would cushion the blow for many, and give the ratings agency some leeway when it comes to ratings decisions.

In any case, he said a sell-off in corporate bonds also offered opportunities for long-term investors looking for bargains.

"We really like to lean into markets when things change," he said.

"Certainly we would look at opportunities where we could buy corporates which are getting sold, even though fundamentally they're still rather sound. It would make them cheaper."

This article was originally published on RNZ and re-published with permission.

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