Sovereign Contagion Continues to Worry European Fixed Income Investors

by: Research Recap

Fitch Ratings has published its Q4 Senior Fixed Income survey, which was conducted between early October and 5 November 2010. The survey preceded Ireland’s request for financial assistance from the EU and IMF on 19 November, which has negatively affected funding markets in peripheral economies.

The survey indicated that contagion concerns from sovereign debt problems were the greatest risk to credit market stability, as borne out by recent events.

Reasonable cautious optimism regarding improvement in bank and corporate credit fundamentals, as expressed in the Q4 survey, has again been swept aside by investors voting with their feet in the face of persistent challenges to weaker Eurozone economies.

Respondents’ concern over bank refinancing subsided and at the time the survey was conducted, there was a clear bias in anticipation of improving credit fundamentals, despite the interconnectedness between sovereign credit risk and the financial system. As an asset class, banks saw the highest expectations for increasing debt issuance.

Sentiment on corporates appeared to turn more optimistic as responses indicate a broadly more positive outlook for investment-grade issuers. For example, the proportion of investors anticipating an improvement or a preservation of the status quo in fundamental credit conditions was 88%, with only 12% expecting a deterioration. However, a significant minority expressed lingering concern regarding the outlook for the retail and consumer segment, albeit at a reduced level compared to the last quarter.