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Moody’s: Bond Market Bubble Fears ‘Overstated’

Bond investors can rest easy as there are few signs of corporate debt markets overheating, according to a report by Moody's Investors Service on Friday.

(View More: What Will Pop the Bond Bubble?)


"Recent concerns about a 'bubble' in corporate bond markets look overstated… Overall, drivers of demand and supply offer no strong evidence that recent issuance levels presage a damaging correction," analysts Colin Ellis, Antonio Garre and Alastair Wilson said in a research note.

The Moody's analysts noted that investment-grade corporate credit prices are close to long-run averages, while speculative-grade credit prices are only slightly higher.

"There is little reason to think that the pattern of investment-grade corporate issuance is unsustainable: investment-grade credit spreads over benchmark government bonds look close to long-run averages, rather than tighter than usual and there is little strong evidence of a shift in non-price factors," they said.

"High-yield credit spreads are indeed somewhat lower than average in both Europe and the U.S., but the gap is not yet large and factors such as issuance levels and projected default rates suggest that any subsequent correction would be manageable."

(Read More: Junk Bonds: Best in Class or Dangerous Bubble?)

The analysts acknowledged the surge in debt issuance in the last 18 months, but said it was not being driven by increased leverage, making a sharp price correction unlikely.

(Read More: Stocks Versus Bonds: Why Not Bet on Both?)

"Some of the recent strength in issuance is likely to reflect the disintermediation of the banking sector, particularly in Europe. However, debt securities remain a fairly small proportion of total corporate liabilities in the euro area, and have not significantly increased either in the U.S. or Europe over the past two years," they said.

In an interview with CNBC, Ellis said ultra-loose monetary policy was partially responsible for the high demand for corporate credit.

"We have obviously got a lot of liquidity out there from central bank actions," said Ellis, who heads the macro financial analysis team at Moody's.

"One of the encouraging things we have seen is that it is not really new managers coming into the asset class. It seems to be experienced fund managers who have been given the money and hopefully, they are more likely to know what they are doing... We have seen a bit of a portfolio shift away from government bonds and towards the corporate market, so it looks like those fund managers are just doing some portfolio rebalancing."

—By CNBC's Katy Barnato

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