Fixed-Income Players React to Credit Crisis

July 21, 2008 (PLANSPONSOR.com) - A new study of the institutional fixed income space has found that investors are making "fundamental changes" to their strategies because of the upset in the global credit markets and are getting ready to take a more active role in researching future fixed-income holdings.

A Greenwich Associates’ news release said those were two key findings of its latest Fixed-Income Investors study. According to the announcement more than 60% of respondents said¬†they are shifting their investments to higher quality fixed-income securities and nearly 55% say they are tightening risk-management policies.

Another one third say they are unwinding underperforming fixed income positions and an equal number say they are taking advantage of investment opportunities in illiquid securities.

According to Greenwich Associates, among institutions saying they need to unwind underperforming positions, about 30% are looking to unload asset-backed securities and/or investment grade credit bonds, and about a quarter are seeking to unwind positions in mortgage-backed securities.

At 47% of respondents, institutions with more than $50 billion in annual fixed-income trading volume – the most active traders in the country – are much more likely than other institutions to say they plan to unwind underperforming positions in coming months. “The market’s biggest traders are still dumping problem securities, not buying,” said Greenwich Associates consultant Tim Sangston, in the announcement.

The demise of Bear Stearns – a central player in credit default swaps and other derivatives – intensified an already growing concern among institutional investors about the solvency of their fixed-income counterparties, the study found.

Institutions also appear to be responding to the global credit crisis by expanding their in-house research and analytic capabilities. Overall, almost 30% of the institutions participating in Greenwich Associates' 2008 Fixed-Income Investors study plan to expand credit analyst staffing. That share jumps to 47% among hedge funds, 34% among other investment funds/advisers, and 43% among all institutions generating more than $50 billion in annual fixed-income trading volume.

"There has been an industry-wide realization that institutions should not be investing in securities that they do not understand," said Greenwich Associates consultant Woody Canaday, in the announcement. "Going forward, institutions will be less likely to buy a product based solely on a rating or analyst recommendation and more inclined to rely on their own internal research."

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