9th Jan

PIIGS is Equal to the Challenge says Leading Bond Expert; Urges Caution for Retail Bond Investors

Portugal, Ireland, Italy, Greece and Spain - collectively the 'PIIGS' - are looking more buoyant as economies recover and bonds are shored up by the ECB.



Head of fixed income at Old Mutual Global Investors, Christine Johnson, believes that Europe’s ‘periphery’ nations are on the way back for bond investors as economic growth improves.

Johnson considers the yields they offer are 'certainly more attractive' than those in core nations such as Germany and France, but said that ‘investors still need to do their homework on each individual bond offering rather than being country specific'.

‘The bond markets within the Eurozone are now more sensitive to GDP movements as investors generally become more optimistic regarding prospects for future growth,' she said. 'Investors are now less defensive in their outlook for bond markets.’ 

Since European Central Bank (ECB) president Mario Draghi confirmed that it would do “whatever it takes” to ensure the survival of the euro, banks have effectively been underwritten by the ECB. 


Relief as Taper Has Minimal Impact

Johnson, who manages the Old Mutual Corporate Bond and the Old Mutual Monthly Income Bond funds believes that the tapering of the US Federal Reserve’s quantitative easing programme, which was finally announced before Christmas, has had minimal impact on bond markets as it had been telegraphed for so long.

In response she disclosed that in recent months she has reduced the duration of the bonds she hold, thereby reducing the funds’ vulnerability to rising interest rates, which it is believed could come sooner than Mark Carney’s predictions.

However, net inflow of investment has been into bond markets rather than equities, which indicates that those that retreated to cash or gold are only slowly regaining their confidence.


Retail Bonds - Choose Carefully, Seek Ratings


Ms Johnson urged private investors to be cautious when considering retail bonds; ‘There is a huge divergence in the quality on offer. An investor in that space should certainly look for bonds which have an interest rate 3 to 3.5% higher than the interest rate offered on ten-year US Treasury bonds.’ she said. 

She also highlighted the thorny issue of ratings by stating the importance for investors of ensuring that any retail bonds in which they invest have a credit rating. 

‘For a private investor, they are unlikely to have the time or the resource to really look into the companies issuing most retail bonds. A credit rating represents the neutral opinion of a third party that has examined the bond issuer. Without a credit rating, all a private investor knows about a bond is what they are told by the bond issuer and the business – they are salesman and not really acting in investors’ interests.

'I would also say that if a bond issuer doesn’t want to pay to get a credit rating, or doesn’t want to work with the agency to get a credit rating, an investor would have to ask serious questions.’

Users of  Retail Bond Expert will recognise the sentiment, but also be aware of the argument that the cost of a rating could have a negative impact upon the coupon an issuer is able to pay.

As we move into 2014 and eagerly anticipate our first issue of the New Year, Mr Bond would be very interested to hear from anyone with an updated perspective on the rating debate and particularly to hear of any progress from ORBIG regarding its proposed ‘traffic-light’ system - (ORBIG Predicts Green Light for Independent Ratings - Retail Bond Expert 24th June 2013)   

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