European swap and credits spreads, usually highly correlated, have significantly de-linked lately, making triple-A to single-A corporate credits unusually cheap. A combination of the impact of the Sept. 11 attacks and Europe's slowing economy has pushed out credit spreads. And, swap spreads have tightened on the back of European governments increasingly becoming receivers of swaps, propelling the decorrelation, according to Ciaran O'Hagan, credit analyst at Lehman Brothers in London. "The [corporate debt] market is a bargain right now," said Keith Patton, portfolio manager at Deutsche Asset Management, in London. "You just have to pick the right one," he added.
Investors underscored that security selection is key and that there is no one particular sector that stood out from the others. Paul Young, head of European syndication at Schroder Salomon Smith Barney in London, says there are a large number of credits trading at extremely wide spreads to swaps. "You can pick and choose credits right now. There are some incredible values," he adds. Prior to Sept. 11, five-year Euroswap spreads were at roughly 33.5 basis points and double-A credits were trading at about 50 basis points over German bunds. As of last Thursday, five-year swap spreads were at 31.5 basis points over LIBOR and double-A credits were at 55 basis points over bunds. Moreover, the spread widening is even greater further out on the credit spectrum.
"The credit market has been oversold and there is already a lot of negative news priced in," said Marino Valensise, head of credit at Baring Asset Management in London. Valensise said that now is the time to take on some corporate credit risk and to sell swap-related products such as supranationals, agencies and sovereigns--bonds that trade in lock-step with swaps. He favors utilities such as National Grid and Innogy because they are both involved with gas and electricity distribution and aim to become global players. He said industrials are now priced so wide that they represent a good investment opportunity, however, he declined to say which ones in particular caught his eye. Among telecom credits, he noted that France Telecom and Deutsche Telekom were still too risky, but that Telecom Italia's credits have been dragged down and now the '06s and '11s are good value at 200 and 230 basis points over bunds, respectively.
John de Garis, portfolio manager at Credit Suisse Asset Management in London, cautioned, "Security selection is so important. Now is not the time to be brave." He said he would look to up his credit exposure at some point, most likely in single-A credits in the five-year area, which have seen significant widening. "The problem is timing. It's not clear when the trough in the market is coming. There may be better opportunities still to come," he said. CSAM's de Garis mentioned he may add some telecom credits, but avoid cyclicals. He declined to name specific credits he might add, because CSAM is reviewing all its positions right now.