Surge in corporate assets boosts bond fund diversification, says Moody’s

Corporate bond issuance has risen significantly this year, giving fixed-income investors greater opportunities for diversifying their portfolios across issuers and sectors, says Moody’s Investor Services.

In a new report, “Managed Funds: Boost to Corporate Asset Supply Enhances Bond Fund Diversification”, Moody’s notes that corporate bond issuance increased significantly in 2012, largely driven by monetary policy actions that alleviated market anxiety about severe funding constraints in Europe and set market expectations for a prolonged period of low interest rates.

Overall debt issuance in 2012 was strong across many sectors as borrowers took advantage of lower funding costs. Year-to-date global issuances of industrial, utility, and financial institution bonds exceeded $2,800 billion, up by more than 22% for the same period in 2011.

The changes in sector exposures of Moody’s-rated bond funds reveal that investments in corporate debt have increased materially this year, while the number of different corporate issuer names in bond fund portfolios rose by nearly 20%.

Soo Shin Kobberstad, a Moody’s Vice President – senior analyst and author of the report, said: “We believe that the surge in corporate asset supply is credit positive for bond funds, because it has provided them with better opportunities for diversifying their portfolios both across issuers and sectors. The broader and more diverse portfolio of exposures in bond funds will bolster bond funds’ resilience to credit shifts in the future.”

However, Moody’s also notes that given the uncertain outlook for future revenue growth, corporate borrowers may choose not to tap the bond market in the coming months at the pace seen year-to-date.

“Against the ongoing investor appetite for bonds, and in particular given the significant investment flows searching for higher yields, lower debt issuance levels in the coming months could lead to bond funds increasing their allocations to speculative-grade investments, which will intensify the need for bond funds to carry out careful fundamental credit analysis,” says Kobberstad.

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