Standard & Poor’s Ratings Services says that, after a long period of benign conditions, rumblings of discontent are being felt in the global bond markets.

In a new report, S&P says that corporate bonds are expensive, and investors will be challenged in their attempt to match the returns posted in prior years. Nevertheless, low default rates and a relatively narrow gap between upgrades and downgrades indicate credit underpinnings are still solid.

“Among issuers, ‘cheap’ financing will be harder to obtain notwithstanding steady credit fundamentals, in response to an increase both in the underlying benchmarks and a gradual widening of bond spreads from their currently compressed levels,” said Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group. “This implies that the borrowing cost for issuers will likely increase at a time when the corporate financing gap has edged into positive territory.”
Rising momentum in capital spending — most notably the U.S. and Asia/Pacific — is likely to provide a boost to the near-term issuance pipeline, as more issuers rush to acquire financing while market conditions are still supportive, it says.

S&P says the global bond markets are at a cusp, with many of the factors that contributed to the bullishness now poised to weaken from previous levels.
“Global default rates are at a trough, even though the forecast for the coming year remains low in historical terms. Recent data in the U.S. showed a continued slow acceleration in core inflation, slightly in excess of the target set by the Federal Reserve. Moreover, gains in corporate profitability — notably in the U.S. — are also expected to decelerate.”