“The spread is still not very attractive,” Stokes added. “The yield and credit spread curves are too flat. You’re not getting paid enough to go down in quality or longer in term.”
Volume of Debt
Some fixed-income observers are also concerned about the amount of debt floating around. The volume of debt issued by investment-grade companies since the financial downturn could be problematic if the economic cycle sours. Corporate investment-grade bonds now make up $6 trillion, compared to $2 trillion before the financial crisis. While some of the new issues is a result of economic growth, corporate leverage remains much higher than it was in the last cycle, which leaves them open to greater credit risk in case of a sudden reversal.
Furthermore, credit ratings are skewed toward the lower end of the investment-grade spectrum. There are only two corporate issuers in the United States rated AAA while bonds rated BBB make up 50% of the Bloomberg Barclays investment-grade bond index, compared to 38% prior to the financial crisis.
“Leverage is way up,” Erin Lyons, U.S. credit strategist for CreditSights, told CNBC. “The concern is over how much riskier BBB bonds are now.”
“Some think many of them shouldn’t have investment-grade ratings,” she added.
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