Bonds of companies in the financial and other high-quality sectors are likely to benefit from positive technicals once General Motors and Ford Motor Co. are ejected from the Lehman Brothers investment-grade indices on June 1. The switch, which will occur as a result of Standard & Poor's recent downgrades of the automakers to junk, could provide a substantial bid for financials as investors re-deploy their cash in the high-grade market, according to some market participants.
"The high-yield market is not big enough to absorb that much debt... and high-yield spreads act as a floor for triple-B spreads," said Arthur Tetyevsky, managing director at HSBC Securities and a first team Institutional Investor-ranked credit strategist. He is recommending financials on the view investors will be rewarded for upgrading credit quality.
But Ricardo Kleinbaum, director and high-grade credit analyst at BNP Paribas, thinks otherwise. "With the yield curve flattening, financials are not a safe-haven. There is not a natural shift to financial issuers; I don't see a flight to quality," he stated. While he remarked event-risk has heightened, he thinks investors will put their money to work in crossover names in pursuit of spread.
