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Resurgent risk appetite breathes life back into debt market

Resurgent appetite for higher-yielding, or riskier, assets has breathed life back into a debt market left for dead a year ago.

Tuesday, November 24th 2009, 5:51AM

by Paul McBeth

Assets that were exposed to collateralised debt obligations went belly-up after the global credit crunch squeezed highly complex and leveraged mortgage-backed securities, and eroded several hundred million dollars worth of value from funds held by ING, Macquarie and Credit Sails.

Since then, the upturn in risk sentiment has encouraged some investors to take another look at debt securities as their value slowly returns. The Volatility Index, which measures the cost of insuring put options on the Standard & Poor's 500 and is commonly known as Wall Street's ‘fear gauge' has plummeted about 66% to 22.19 this year as investors feel more confident about taking on riskier ventures.

"As the markets opened up again, people's tolerance for risk came back and they took another look," said David Speight, Direct Broking director. "These markets were completely dysfunctional," but they've started to attract more investors as the underlying assets regain value, he said.

Macquarie's Fortress Notes, a highly geared product, wiped about $28 million of value following the collapse of the sub-prime mortgage market last year, while Credit Sales notes lost about $91 million of investors' money. ING's Diversified Yield and Regular Income Funds cost the fund manager and ANZ, the former majority shareholder and now owner, some $380 million.

Since the markets recovered this year, Macquarie's notes climbed to an unaudited net asset value of 29.6 cents at the end of September from being worthless in February, while the unit price of ING's diversified yield fund is reportedly up to 31.37 cents. Credit Sails hasn't been quite so fortunate, with much of its exposure in the failed Icelandic banks and Lehman Brothers.

Speight said the CDO market is probably coming back to more normal levels of investor interest as the global economy recovers expectations on the number of defaults declines.

"The jury's still out on the underlying economic activity," he said. Still, he doubts "things will take a dive" and expects debt markets are heading back to more normal levels.

Paul is a staff writer for Good Returns based in Wellington.

Tags: finance companies

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