In spells of economic slowdowns, monetary policy makers, through both conventional and unconventional monetary policy tools, intervene. More often than not, policy makers initially intervene by utilising conventional monetary policy tools; the act of lowering interest rates.

Although the effectiveness of such tool, as recently envisaged, might not reap the desired outcomes, monetary policy makers have no option left, but to resort to unconventional monetary policy; the act of injecting monies into the economy through security purchases in the open market.

It is worth highlighting that ultimately, the main objective behind both policy tools is to instigate economic growth and revert inflationary levels towards the two-percentage point mark.

Notwithstanding the fact that a low interest rate environment encourages investment - by providing the economy the required boost to regain its strength in periods of slow economic growth, low interest rates tend to negatively impact both institutional and individual investors by their exposition to low levels of risk-adjusted returns.

Refinancing punishing debt holders

It comes as no surprise that in a low interest rate environment, companies at all levels of credit, with outstanding debt, seek to refinance, this to benefit from that current interest rate environment.

Through refinancing, levered companies tend to enjoy a reduction in the amount of interest payments owed towards its bondholders; a move which may indeed be frowned upon by investors, whose yield on investment seems to take a hit, thus being unfairly compensated for the risk being undertaken.

The recent widening in spreads

Economic indicators have always been an important reference for investors’, to help judge the overall health of an economy.

Consequently, influencing market sentiment and the markets at large. In fact, following the recently published economic data, which proved to be sluggish, with important indicators seeming to experience further deterioration, bond market spreads widened. Bond markets reacted as concerns intensified that the global economy is on the edge of a slowdown, probably heading towards another recessionary period.

Given the recent economic data, investors are being cautious in their investment positioning as the sluggish economic data continues to dampen their sentiment, even on the basis that the trade war saga continues to be surrounded by numerous uncertainties.

As aforementioned, the implementation of conventional monetary policy has led to interest rates revolving at low levels and instigated corporates to refinance at cheaper level. As such, opportunities to generate yield considerably declined, this exerting further pressure onto investors. Albeit this, the recent widening in credit spreads, resulting from economic uncertainty, has presented investors with an opportunity. A chance to take advantage of attractive entry points, which may prove to be fruitful in the days to come.

To conclude, one may note that in order to gauge these opportunities, a bottom-up approach might be a more diligent move to ensure the sanity of a credit story and its capability of servicing its debt in the near future, despite a slowdown in global economy. Spreads tend to move fast and thus investors need to take the opportunity at the most appropriate timing.

This article was issued by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. For more information visit, https://cc.com.mt/ . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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