Rising defaults – should bond investors worry?

The Australian credit cycle may be taking a turn for the worse. Local banks have recently reported rising bad debt problems. But before corporate bond investors rush to dump their bond funds, we advise to pause and put things in perspective. Bad debts are currently near zero percentages in Australia. The sectors most at near term risk are those linked to second tier resources companies. Longer term, the household sector looks most vulnerable to a sharp increase in debt stress. Neither have a large direct influence on the Australian dollar corporate bond market. Spectrum forecasts that the biggest issuers of bonds - banks - can comfortably absorb the likely increase in bad debt costs over the next year; hence, maintaining their sound financial strength. Most other corporate A$ bond issuers are investment grade with resilient business models and balance sheet flexibility. The recent weakness in $A corporate bonds improves the sector’s value and helps deliver attractive returns for the moderate risk taken over the next twelve months