Institutional investors and Barclays Capital have a message for those who think the sovereign debt crisis is over: It isn’t. Demand for such investments has plummeted just as the governments are ramping up supply. Barclays surveyed 582 institutional investors, 82% percent of whom said they expected either debt restructuring, default or a full-fledged euro-zone crisis, according to Stephen Fiedler’s recent Wall Street Journal article, “Investors in riskier bonds may not be coming back.” They do not believe government officials who tell them that all euro-zone government debts will be repaid on time.
In addition to fear of default by Greece, Portugal, Ireland and Spain, their bonds have become too volatile for these investors. “I think the biggest structural shift has been in market volatility,” says Arif Husain, director of U.K. and European fixed income at AllianceBernstein, the asset-management firm. Increased volatility counteracts the three out of the four usual reasons why investors buy bonds: (1) stability and security of capital, (2) negative correlation with stocks, and (3) ability to have investments mature at the same time as future payments to pensioners. The fourth reason ? income generation ? still exists, since yields are rising due to increased risks.
At the same time that buyers are shunning euro bonds, supply is increasing. While these governments are trying to cut benefits, they cannot do that quickly and must borrow to cover deficits and maturing debt, according to the article.
Fidler concludes: “Selling these bonds will be a challenge. As politicians discuss ways to prevent the next crisis at the European Union summit continuing Friday in Brussels, this dynamic in the bond markets suggests they shouldn’t be too confident about having surmounted the current one.”
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