Short Supply Of Bonds Is Eroding Quality And Influx Of Investing Is Increasing Risk

 
Historic deposits have driven yields to record lows and continued demand is eroding credit quality of the bonds still available.
 
Investment grade credits have also experienced more downgrades this year than upgrades for the first time in three years.
 
So many bonds have been purchase that liquidity in the marketplace is being squeezed. This could cause significant problems in the case of a bond selloff.
 
Net inventory at primary dealers was only around $50 billion around the end of October, down from $300 billion in 2007.
 
The only bright spot seems to be local-currency emerging market debt. The local currency component should offer future appreciation against the dollar, giving the bonds an extra option for return.

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