The portion of new bonds that include protection against rating cuts has soared to a record high, showing investors are nervous about the fixed income market.
The way the protection works is that the bonds’ interest payments increase if the borrower’s credit rating is downgraded.
Sales of these so-called step-up bonds hit $37.3 billion in March, amounting to a record 12.4 percent of all new bonds issued, Bloomberg reports.
Obviously investors aren’t too confident about the prospects for some of the companies issuing bonds.
“The recent use of step-ups shows some investors are still concerned about downgrade risks, despite a rally in corporate debt,” Sarwat Faruqui, a director of capital markets origination at Citigroup, told Bloomberg.
Investors also are worried about companies’ bulging debt levels.
“Companies are offering incentives such as step-up coupons and ratings commitment language in order to attract a broader range of investment-grade investors” who might shy away thanks to the debt buildup, Mark Lewellen, head of corporate origination at Barclays Capital, told Bloomberg.
Moody’s Investors Service has downgraded or lowered the outlook for more companies’ ratings than it upgraded for 11 straight quarters.
Many experts say the great bull bond market will soon end, thanks to the burgeoning budget deficit and government debt burden.
"This is the last leg of money coming off the sidelines, the final rotation into the bond market," Bob Froelich, senior managing director at The Hartford, told CNBC.
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