Credit markets are likely to remain volatile in the short term on investors’ persistent fear of risk, despite another cash injection into the banking system by the European Central Bank on Monday, Jeroen Van Den Broek, Head of Investment Grade Credit Strategy at ING Wholesale Banking, told “Worldwide Exchange.”
“In the commercial paper market there is a bit of a return in liquidity, but not substantially quite yet,” Van Den Broek said, adding that demand for long term credit is fading. “For the time being, we are moving predominantly into cash.”
He said banks “will not be too happy” holding corporate debt at this stage and corporate bonds, particularly those not rated as investment grade, may still suffer. “The sub-prime woes have hit into the credit markets and we’re not through the worst of that quite yet,” Van Den Broek said.
He also said the way credit derivatives are traded may change in the future, following the recent market turmoil. “The supply of these transactions will diminish and they will need extra credit enhancement or credit security before they are sold to real money investors.”