Lack of corporate bonds causing concern
A search for yield in a low-interest rate environment is driving demand for an increasingly tight supply of corporate bonds.
Friday, April 10th 2015, 6:00AM
by Susan Edmunds
Christian Hawkesby, of Harbour Asset Management, said many financial advisers he had spoken to were concerned about the number of corporate bonds maturing, comparing to the low number of retail issuances.
“Advisers are right to be concerned,” he said. “It is true that there have been fewer good quality retail bond issues and it is true a steady pipeline of bond maturities is approaching.”
Advisers would have to decide what to do with the money coming in, he said. Only 30% of corporate bond insurance since January 2104 had been available to retail investors.
Hawkesby said the change in the composition of corporate bond issuance away from retail was influenced by the growth of KiwiSaver, providing a ready pool of cash to create wholesale demand, and issuers finding it easier to issue directly into the wholesale market where they did not need retail documents.
“Stricter regulation to protect retail investors may have rerouted some corporate bond flows into the wholesale market.”
Michael Gray, Senior Portfolio Manager at Caliber Investment, said investor appetite for corporate bonds had grown although there had been an increase in the level of new issuances in New Zealand and internationally.
“Investor demand for corporate bonds reflects a low-interest environment globally and the chase for yield, with investors looking to enhance returns above what they can get on bank deposits.”
He said yield spreads had reduced on corporate bonds, and holders were not being as well compensated for the risk they were taking, compared to government bonds, as they had been historically.
But adviser Brent Sheather said he had not encountered a problem. “There’s a huge secondary market for bonds. Anyone who fears a liquidity crisis is probably being a bit silly. We have no problem putting together a diversified bond portfolio when bonds mature. The extra pick-up you get from buying on the primary market over the secondary market isn’t sufficient to lose much sleep over.”
He said it was possible the advisers could make more money dealing in the primary market. “Lots of dodgy bonds pay commission. The higher the commission a bond pays, the higher a risk it is. “
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