Investors in credit markets are demanding substantially higher yields in return for the risk of owning corporate debt instead of haven government bonds. But one investor reckons this may not necessarily portend a wave of corporate defaults.
In a blog post, Toby Nangle, head of multi-asset allocation at Columbia Threadneedle Investments, which manages £320 billion ($495 billion) in assets, noted that while there had been a worsening of certain leverage metrics—corporate gross debt as a share of earnings before interest, tax, depreciation, and amortization (EBITDA) for instance—the shape of the yield curve is sending a less alarming signal.
As Nangle notes, except for highly speculative debt, there is scant evidence of credit spread curves flattening.
Typically, in periods of excessive turmoil in financial markets, yields on short-dated debt rise more than those on longer-dated debt as investors fret over getting back their original investments in the immediate future.
This trend of flattening and inversion of the yield curve played out in Greece during the sovereign debt crisis when yields on near-term bonds surged well above more long-dated bonds. Eventually, Greece ended up restructuring its debt.
In more placid times, yields on bonds maturing further down the line are greater than those on shorter-dated debt as investors expect faster expected growth to lead to higher interest rates and as a consequence, higher yields.
Chart: Columbia Threadneedle