Opportunities exist in credit securities following the reassessment of non-government risk which has seen yields rise dramatically and liquidity premiums at historically wide levels, according to the latest research paper by Tyndall/Suncorp Investment Management.

The research paper, “Opportunities in the Credit Market”, says that, although markets have recently stabilised, continued volatility is expected as the economic outlook becomes increasingly uncertain.

“A consequence of the significant price correction seen over the past year is that credit now provides good opportunities for investors, particularly for some defensive credit sectors, and especially the highly-rated financial sector,” said Mr Roger Bridges, head of fixed income at Tyndall/Suncorp Investment Management.

“On a risk-adjusted basis, the spreads currently available on highly rated credit securities represent the best value we have seen in over a decade, providing investment opportunities for long-term investors.

“Investing in selective credit securities on any market weakness allows a portfolio to benefit from either a lowering of these risk premiums as well as enjoying the extra running yield against the risk free curve.”

Mr Bridges says that the main benefits of adding credit securities to an investment portfolio are the potential for higher returns, and diversification.

“The expectation that there will be an increase in credit defaults, and the reduced appetite for risk, has seen credit securities underperform bank bills by around 2.8 percent (as at March 2008). In our view, this re-pricing is unprecedented and unsustainable, and we expect to see higher returns from the credit sector going forward, more in line with historic returns.

“Additionally, the low correlation of credit securities to equities or bank bills provide diversification benefits to a portfolio that should be an added attraction for investors.

“However, many investors are failing to take advantage of the current situation.

“Despite historically wide spread levels, the factors in play since April last year – including deteriorating credit conditions, the ongoing liquidity crunch, increasing contagion to other credit sectors from the financial sector, and the possibility of a global recession – are driving investors away from the credit sector.

“A fund manager’s ability to accurately assess credit quality and monitor credit risk exposure, diversify across the credit spectrum and evaluate the risks return profile is an integral part of taking on credit risks in a fixed income portfolio,” Mr Bridges said.