Moody’s Investors Service says that worries about a widespread bubble in corporate bond markets are overdone, and that the sources of concern appear to be manageable.
In a new report published Friday, the rating agency says that the current low yields for corporate paper “have led to concerns that investors may be underestimating the risks associated with corporate debt, and that any subsequent crystallization of these risks could lead to a sudden fall in bond prices.”
However, Moody’s concludes that the evidence of a ‘bubble’ in bond prices is limited, “as investment-grade credit spreads are currently close to their average levels in Europe and the U.S.”
It notes that yields are low overall, but suggests that this largely reflects the low levels of benchmark government bond yields, and “any jump in these benchmark yields could reflect wider macro financial risks rather than those specific to the corporate bond market.”
“High-yield credit spreads appear somewhat lower than average, but the gap is not large and there is little sign of an imminent correction,” it adds.
“Investors have increased their exposure to high-yield paper in an attempt to pick up some extra return, and spreads look a little low at the moment,” said Colin Ellis, Moody’s senior vice president for macro financial analysis and author of the report. “But the risks associated with the asset class should not be blown out of proportion: default rates have been low since the financial crisis hit, despite the relatively slow US recovery and the ongoing euro area debt crisis. Overall, companies acted quickly to cut back on spending, so balance sheets have typically strengthened over the past few years.”