by Joe Sarbinowski, Global Head of Institutional Liquidity Management Distribution, DB Advisors
Why do treasurers and other fixed income investors need to rethink risk management?
The composition of bond markets has changed dramatically in recent years, first due to stresses in the financial sector, later as a consequence of sovereign debt problems and subsequent downgrades. Simply put, there are fewer high quality, highly rated securities than there used to be, while markets have become more volatile.
How serious is the challenge?
At the end of last year, only about 7% of the corporate ratings issued by Standard & Poor’s worldwide were ‘AAA’ or ‘AA’, with fewer than 40 companies in the top rating band and only about 360 in the second tier. In Europe, just 11 financial issuers and three non-financial ones hold the ‘AAA’ rating. The US corporate bond market tells a similar story: according to Fitch Ratings, in 2011 less than 10% of outstanding US company debt was rated higher than ‘A’, down from over 20% in 2005.
Can we expect an improvement?
Not in the near term. Downgrades are continuing to occur, and negative bias (the number of issuers with negative outlooks divided by the total number of issuers) stands at 30% for financials and 28% for sovereigns.