Biggest Concern for Bond Investors: Sovereign Debt Problems

(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.