Biggest Concern for Bond Investors: Sovereign Debt Problems

According to Fitch’s latest European senior fixed-income investor survey, Europe's sovereign debt crisis remains a major worry with 64% of respondents, up from 56%, expecting developed market sovereigns to face their biggest refinancing challenge.

(May 25, 2011) — Europe’s sovereign debt crisis has remained a major worry for investors, according to Fitch’s latest European senior fixed-income investor survey, obtained by Global Pensions.

The survey, conducted between March 31 and May 2, polled the views of managers of an estimated $4 trillion of fixed-income assets.

The biggest concern for bond investors, the survey showed, is Europe’s sovereign debt crisis, with 64% of respondents, up from 56%, expecting developed market sovereigns to endure the biggest refinancing challenges.

The worries echo recent sentiments by Harvard professor of economics Gita Gopinath, who said during an investor forum that pensions — typically large bondholders — may be forced to take a loss on their investments as a result of the European sovereign debt crisis. At the Dublin-based forum — titled Adjusting to New Realities — among Europe’s largest institutional investors and asset managers responsible for the investment of more than €1 trillion of funds, 75% of those in attendance saw a high likelihood of default in the Eurozone within three years. Gopinath asserted that the solution would likely be for bondholders, namely pension funds, to take some form of a loss on their investments, “given the sheer scale of the debt amounts involved.”

Fitch’s study additionally showed that inflation concerns continued to rise, with 68% of respondents seeing inflation risks as high, up from 55% in the previous survey.

Furthermore, the study revealed a growing concern among managers over credit prospects. Compared to 40% of respondents that expected improvements in credit conditions for high-yield assets to decline in the previous quarter, the study showed that the percentage increased to a total of 53%. Meanwhile, concern over banks has lessened, with only 17% of respondents saying they were worried about banks’ refinancing issues, compared with 35% in the previous survey.

Lastly, Fitch reported that the commitment to emerging markets, which has attracted the most consistently bullish sentiment over the last four quarters, has continued to gain steam.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742