No credit bubble in sight, says F&C

“There is no credit bubble in sight,” says Rebecca Seabrook, the director of UK credit at F&C Investments.

She says factors such as credit spreads in the utilities and healthcare sectors have sparked a debate about a credit bubble.

“The perception of credit quality has improved this year and investors are willing to buy their bonds. But I don’t think there is a bubble,” she says.

Increased risk controls from institutional investors, market dislocation and polarisation across sectors have contributed to the idea of a bubble, says Seabrook, as have the flow of issuance and quantitative easing.

“£2 billion was put into new corporates. That is the biggest inflow the market has seen for a while,” she says.

However, bank lending is still frozen. “Banks don’t have balance sheet capacity. [Their] balance sheets are stretched and need to be cleaned up before banks can start lending again.”

Therefore, she says, credit markets are still closed to many potential borrowers who try to raise capital to finance their activities.

Seabrook says that in the first two months of the year there was about £25 billion of new issuance. This will increase supply in the market and reduce the effect of any speculative pressure, she argues.

When the Bank of England announced it would inject £75 billion into the British economy by directly purchasing securities, it was thought to involve predominantly corporate bonds.

However, Seabrook notes, the purchases will include gilts, commercial paper, paper issued under credit guarantee, syndicated loans and some asset-backed securities.

The response of the corporate bond markets has been fairly muted, says Seabrook.

“Considering the current economic climate, I don’t expect the credit crunch to be over by the end of this year.”

Seabrook expects increased attention to risk management by institutional investors. This “may lead to a lower weighting towards credit overall, which could see a slowdown in the demand for corporate bonds,” she says.

In terms of the British economic stimulus package, she says the market has viewed it positively. However, it is still unclear when the market will recover.

“The government does what it can. We are not going to find an overnight solution. It takes time and we have to consider the long-term effects too.”

Seabrook concludes that speculative bubbles emerge when too much money is chasing too few assets, but she says there are still plenty of assets to buy. Markets need to normalise before another speculative bubble can build up, she adds.

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