M&G corporate bond fund manager Richard Woolnough predicts a shortage in the supply of corporate bonds in the next two years.
He said the past two years saw a strong supply of corporate bonds but, with many now completing their financing, that supply is set to dwindle.
He said there will only be a small supply of corporate/investment-grade debt while there will be a huge supply of government debt. He said: “We think the spreads between corporate bonds and government bonds will come in substantially and there will be less supply.”
Woolnough said supply of corporate and investment-grade debt could also shrink if rating agencies become aggressive in their treatment of senior bonds and subordinated bonds in weak economies. He said: “Those senior and subordinated bonds, like the Irish senior bonds, will go sub-investment-grade and they will drop out of the index. If a substantial part of the index drops out, only leaving the traditional investment-grade corporate bonds, people will bid on them and they will get squeezed to the point where somebody will sell but it has to be a higher price to get out or for an asset allocator to switch and take a different type of risk.”
Woolnough said there is great value in a number of banking bonds but there are still dangers with them, while the credit and investment-grade market is very attractive. He said: “The high-yield market is doing what the investment-grade market was doing last year – offering lots of supply and taking a while bringing deals to market to access money for the capital markets. In a year or two, the supply of high yield will fade and collapse and will get dear.”