Allianz GI's Riddell: Looming credit meltdown risks creating corporate bond fund illiquidity shock

Central banks less likely to step in

Markets are “grossly underestimating” the risk of a potential liquidity crisis in corporate bond funds, Mike Riddell, head of fixed income macro unconstrained at Allianz Global Investors, has said.

During the last decade of low interest rates, non-financial corporates have leveraged up their balance sheets. However, as rates go up, the manager of the £2bn Allianz Strategic Bond fund said these firms will start "feeling the pain" as their debts come due and they have to refinance at higher costs. "As they start to refinance these debts, they are going to really feel the crunch, and then they go under," he said. "I think the really big problem is non-financial corporates, but credit spreads are not pricing in any kind of problem here," he said.  Riddell noted that if non-financial...