According to Pattullo the market is now pricing-in a default rate of 35 per cent over the next five years. He says: “While we may be at the beginning of a far more ruthless default cycle, we don’t subscribe to the view that nearly one in three investment grade companies won’t emerge from this current crisis.”
However, Pattullo warns of further de-leveraging cycle due to recent falls in high yield and emerging market credit. He also says that the diminishing hedge fund industry could increase fire sale of assets and new issuance is putting pressure on existing bond prices.
According to the fund manager the outlook for financial bonds has improved considerably and Barclay’s recently announcement of a possible £6bn cash injection from the Middle East is another big positive for bond investors. He says: “Barclays can keep their balance sheet secure, fulfilling their capital raising obligation to the UK Government, while keeping them out of the Barclays boardroom. In addition it stops Barclays issuing more bonds into the European corporate bond market.”