In some good news (keeping with the “less bad is good” motif that has propelled equity markets) for the corporate bond market, the pace of downgrades slowed significantly in the second quarter 2009. U.S. corporate bond downgrades continued to dominate in the second quarter of 2009 but on a par basis had less impact than in the previous three quarters, according to Fitch Ratings, in a new report, titled “U.S. Bond Market: A Review of Second Quarter 2009 Rating and Issuance Activity,” [registration and/or subscription required – registration is free].
Of total market volume, 5.5 percent was affected by the downgrades. The par value of corporate bonds affected by downgrades totaled $192.2 billion for the three months ending in June. While still high, the figure is down significantly from the first quarter’s record tally of $522.4 billion, and below levels registered in the second half of 2008.
By percentage of volume, the 5.5 percent was well below the 14.5 percent hit associated with first-quarter downgrades and downgrade rates of 7.8 percent and 10.6 percent recorded in the third and fourth quarters of 2008, respectively.
Downgrades fell across the investment grade and speculative grade areas and across financials and industrials. The biggest decline, however, occurred among investment grade financials, which saw downgrades contract from $382.1 billion in the first quarter to $104.7 billion in the second quarter.
Among investment grade industrials firms, downgrades fell from $44.3 billion in the first quarter (3.2 percent of investment grade industrial volume) to $29.6 billion in the second quarter (2.0 percent). At the speculative grade level, downgrades contracted from $96 billion (14.8 percent of speculative grade bonds) to $57.8 billion (8.7 percent) quarter-over-quarter.
The depth of the economic downturn, recently confirmed as the most severe since the 1930s, is evident in the large share of the U.S. bond market that has been affected by negative rating migration over the past year. In the first half of 2009 alone, downgrades affected 20 percent of outstanding U.S. corporate bonds.
One forgotten side of the “less bad is good” euphoria, is that stabilization is not the same as recovery. Recovery means growth, and there is little of that to be found in the economic data. Subsequently, while downgrades are slowing, there is no upswing in upgrades. Upgrades remained extremely limited in the second quarter, totaling just $11.8 billion, or just a small fraction, 0.3 percent, of market volume.
The new report offers additional details on issuance patterns, rating activity by broad market sector and industry, and bonds coming due, and is available on Fitch’s web site, ‘www.fitchratings.com‘, under Credit Market Research.
In addition, Fitch recently also released the results of its semi-annual Fitch Ratings / Fixed Income Forum survey of professional money managers. Among key findings, the survey revealed a far less negative view of economic and credit market conditions than earlier in 2009 and in some investment areas, new optimism for a rebound in fundamentals over the coming year. The report is titled “Sentiment Lifts Among Senior U.S. Fixed Income Investors – Credit Outlook on the Mend” and is available on Fitch’s website under Credit Market Research [again, registration and/or subscription is required]. This author will issue a post soon here on this issue. There are good investing opportunities in this market, but given the economic landscape, it takes a lot of research to dig out such opportunities – do not blindly put your hard-earned dollars to work just because things are “less bad.”
Gregg D. Killoren
victoria1014
