In its monthly review of Australian debt and hybrid securities, Morningstar said while a change in the direction in credit spreads seems unlikely given the very low default environment, “emerging markets have the propensity to spread to developed markets”.
Morningstar said it therefore remains conservative in its estimates for listed fixed income.
The review said investors should be aware of the influences of the zero interest rate policy of developed nations and the above trend primary issuance in the listed interest rate security market, with the SMSF sector seeking to “satisfy its appetite with yield-based products”.
While the US economy and global credit market valuations are at more advanced stages of recovery, Morningstar said a change in policy will bring with it reduced liquidity which is likely to lead to a correction in prices across all markets.
The review said demand from the SMSF sector for yield-based products has not changed in the past six months, which is clear from the “scaling back of allocations in the [ANZ] Banking Group and Suncorp Group”.
“The problem is new issuance has slowed significantly as the corporate sector remains closed and the banks have matched the majority of their requirement for additional tier-1 capital,” Morningstar said in the review.
“This puts pressure on the secondary market, which is illiquid at the best of times, and hence prices increase and credit spreads tighten”.
The review also warned that “all risk assets have a price” and investors should therefore be wary of chasing yield at the expense of quality.
