Few in the markets will argue that the performance of debt and credit markets during 2006 was as it was expected to be. At the beginning of the year global economies were strong; interest rates were at historically low levels, spreads were tight and there had been substantial growth in all types of securities. It was generally felt that the only way to go was down, and so there was a torrent of negative predictions for the year ahead.
“At this time we are looking at a situation where central banks are withdrawing liquidity at the same time that the credit cycle is turning,” was the view of Deutsche Bank’s analysts. “[2006] is generally likely to be a weaker year for excess returns than 2005.”
The majority of other credit analysts shared this sceptical view that the strong performance of the past few years would not continue into 2006. French bank BNP Paribas’ outlook for 2006 declared: “Higher interest rates coupled with gradually deteriorating credit fundamentals should create a more challenging environment for the credit markets in 2006.” It went on to say: “Given tight valuations, we anticipate modest spread widening and credit curve re-steepening during [2006].”