Low systemic risk keeping bond spreads tight

Bond spreads across the board will continue to be tight due to a lack of systemic risk in economies worldwide, according to a senior executive of a leading fund manager.

Tyndall head of bonds Roger Bridges said: “What we’re seeing is systemic risk has fallen not only in the financial markets but also in the growth economic patterns and our own daily lives.

“So when we do get a shock to the system it is not flowing through to the rest of the economy,” he added.

Bridges believes this phenomenon has changed the behaviour of investors and has meant they now feel safer and a lot more comfortable with placing their money in higher risk products.

However, he refused to predict when systemic risk might re-emerge in world economies, as historically it had taken a catastrophic event for this to happen. He used the Enron collapse as an example.

“The question is where will an increase in systemic risk come from? One example was when Enron went down É Because fraud was involved, people weren’t confident that the system was safe and they started hitting everybody around the place, and you started hearing of other companies having fraud and credit spreads [that] generally just took off,” Bridges explained.

According to Bridges, a more likely source of systemic risk would be changes in central bank policy, but the degree to which this could happen is questionable.

“Probably the danger is that with low unemployment and high employment the central banks could over tighten. So my view is that if there is a general expectation of systemic risk, it probably will come through from monetary policy,” Bridges said.

“But at the moment, most people think the central banks will err on the side of caution, that liquidity will still remain and that we won’t get a type of tightening that we saw in the 1980s, which led to the recession of the 1990s, which took them a long time to get out of,” he added.