When the dust settles on the credit crunch, how will it be remembered? Few people believe there will be a re-weighting away from fixed income, the umbrella within which the products that have caused the dislocation ultimately sit.
Think back to the turn of the millennium, when the debate raged about funds being far too heavily weighted in equities. The name of the game was to re-weight your portfolio into a more even 50/50 split between stocks and bonds. Equity gave you volatility, and greater upside potential. Fixed income was the safe, steady counterbalance.
As the big reallocation was in full swing, stock markets crashed as the tech bubble burst. Suddenly equity stopped giving the rapid gains expected of it, and was in fact contributing the exact opposite.
Meanwhile bond markets were stable, with interest rates low and credit defaults minimal. But where would the excess returns come from?
Against this backdrop, credit markets took off. Investors saw an opportunity not just for safe investment in fixed income, but also risk for some reward. The phenomenon reached its peak over the past two years, as credit investment became more and more risky.