In its Australian Debt & Hybrid Securities Research Monthly Review for June, Morningstar said issuance has slowed relative to previous years, with issuances down year to date, while the low interest-rate policies maintained by the developed nations drive the search for yield.
Morningstar credit analyst John Likos said both these technical factors are influencing the pricing of listed debt and security products as “credit spreads grind tighter while credit profiles remain stable”.
“This lack of issuance continues to put pressure on the secondary market, further driving prices up and yields down,” said Mr Likos.
“We remain comfortable with the credit profile of domestic credit, but continue to highlight caution when chasing yield at the expense of quality,” he said.
Mr Likos said there is an “imbalance in the listed fixed-income market whereby the strong demand for yield products heavily outweighs supply, continuing to push credit spreads to the limit on fair value”.
According to Morningstar there remain several risks in the global environment that could generate a change in the “near-term direction of credit spreads and repricing the risk premium across the asset classes”.
Mr Likos said China’s economic indicators present a mixed picture, where the economy as a whole appears to be showing signs of stability, but property oversupply remains a key concern.
“We anticipate this pattern continuing in the coming months, but do not think it will have a material impact on domestic listed debt and hybrid market,” he said.
Mr Likos said geopolitical risks in recent months have become another concern for Morningstar and expects them to remain at the forefront of news as the “threat of insurgency in Iraq adds to the crisis in Ukraine”.
“Our third key risk is of yield repricing in the US as the Federal Reserve continues to remove liquidity via tapering,” said Mr Licos.
He believes the search for yield is also increasing risk in the bond market as it drives demand and pushes yields lower.
The yields on 10 years' government debt in countries continuing to battle significant headwinds, including Greece with a yield of 5.9 per cent, Portugal with a yield of 3.5 per cent, Spain at 2.7 per cent and Italy at 2.9 per cent, highlight the “insatiable appetite for yield”.
