Bond investors are shifting towards safer investments due to growing concerns about global economic growth and a recent rally in credit markets. The spread between investment-grade bonds and government bonds has narrowed significantly, approaching its lowest level since the 2008 financial crisis. Large asset management firms like Blackrock and Fidelity International have reduced their exposure to high-risk corporate bonds, opting for safer alternatives instead. Experts warn that this ‘endless narrowing’ could be a sign of an impending sell-off if global economic growth weakens.
Investors are concerned that the recent rally has made credit markets overly optimistic about global economic growth, leading some to take defensive stances in the credit market. Fidelity International’s fund manager Mike Riddell warned that there is almost no room for further tightening in credit spreads, making it essential to be cautious if anything goes wrong globally. Despite this, market expectations suggest the Federal Reserve will cut rates by another four 25-basis-point increments by the end of next year, with corporate balance sheets having strengthened recently.
High-risk sectors are experiencing headwinds, with several leveraged loan deals being shelved and investors pivoting to safer debt. Experts argue that the corporate credit market is overly stretched and failing to price in significant idiosyncratic risk. As a result, some hedge funds are avoiding weaker corporate debt. Meanwhile, asset management firms like M&G are shifting towards higher-rated corporate credit and covered bonds issued by life insurers. The overall yield from corporate bonds remains attractive for many investors, but the shift towards defensive positioning is underway.
Source: https://news.futunn.com/en/post/63364428/in-this-surging-market-are-large-institutions-starting-to-pull?level=1&data_ticket=1759611398768995