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Old Mutual poised for sharp recovery in corporate bonds

The corporate bond market looks set for recovery, with attractive valuations, says Old Mutual fund manager Stephen Snowden.

He believes the market has reached a turning point following the takeover of Bear Stearns. He says the consensus is that the credit crisis has peaked and bonds have reached their lowest valuation point.

He says: “The fear-assisted takeover of Bear Stearns has marked a turning point in the credit markets as the US Federal Reserve demonstrated that it will do anything possible to rescue financial institutions that get into trouble.”

Snowden is gradually buying back into the market with his corporate bond fund in preparation for a sharp recovery.

He says current problems are a result of mass credit leveraging via derivative products. He believes the market remains volatile but it has exaggerated recessionary fears and potential rises in defaults.

Snowden says: “We believe that a recovery in corporate bonds should accelerate as those positions are gradually unwound.

“History shows not only that investment-grade corporate bonds tend to decline dramatically but also that their recovery tends to be V-shaped rather than the market reaching a plateau prior to rebounding.

“Default rates will inevitably rise in an economic downturn but bond valuations are pricing in default rates three times as high as witnessed during the worst ever five-year period in the UK. In other words, current valuations are cheap by any measure of default risk.”

Snowden says it is a positive sign that banks are looking to repair their balance sheets and he draws similarities with what telecom companies were doing with their balance sheets in the 2003 credit market.

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