Bangkok--12 Sep--Standard & Poor's
The corporate bond market is currently navigating several cross currents, according to a report released today by Standard & Poor's Ratings Services. They include growing signs of an economic slowdown amid elevated cost pressures, along with a visible buildup of tensions regarding shareholder versus bondholder interests. While financial markets have been rallying in anticipation of an end to Fed rate hikes, spreads have been inching up, with downgrade activity accelerating in August after a fairly quiet July.
The article, titled "Outlook For U.S. Corporate Bonds: A Crossroad for Credit," states that on balance, Standard & Poor's maintains its cautionary stance on corporate credit, particularly for lower quality segments. Credit metrics are expected to slowly erode, since sub-par economic growth amid rising cost pressures are likely to pressurize profits, leverage and credit quality, raising spreads in their wake and holding down bond market returns.
After pausing in September, the Fed is expected to raise the target rate by another 25 basis points to 5.5% at the October meeting, and then hold policy steady through mid-2007. "However, the cautionary point here is that long lags in monetary policy imply that past tightening has barely affected the economy as yet," observed Diane Vazza, Managing Director and head of Standard & Poor's Global Fixed Income Research. Thus, bond market optimism may be overdone; with the 10-year Treasury yield moving down to 4.78% from a high of 5.25% at June end, yield curve inversion has returned with greater force. In such an environment, corporate bond yields have retreated as well, though less than their Treasury counterpart, causing spreads to slowly inch upward. Standard & Poor's believes the current rates rally is likely to prove short-lived, especially as other major central banks continue to drain liquidity.
The report is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com . If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to [email protected] . The report is also available at www.sandp.com/gfir , listed under Global Fixed Income Research. If you have not previously registered with the site, you will need to do so to access this material. Registration requires minimal information and is free. Members of the media may request a copy of this report by contacting the media representative name provided.
Media Contact:
Mimi Barker, New York (1) 212-438-5054, [email protected]
Analyst Contacts:
Diane Vazza, New York (1) 212-438-2760