KEY POINTS:
New Zealand is still seen as one of the most attractive places for global bond investors despite the country being more than six months into a recession.
Gerard Fitzpatrick, global bond manager for Russell Investments, which manages money on behalf of large companies around the world, said New Zealand was in the top three of preferred countries among its managers.
It ranks New Zealand bonds behind Mexican and Australian bonds based on interest rates.
London-based Fitzpatrick, who has been in New Zealand talking to the firm's clients about the credit crisis, said an increase in company failures and defaults on bond investments was expected by managers around the world as the credit crunch was felt in the real economy.
But defaults in investment grade bonds (those rated triple B and above) would have to get as high as 6 per cent for it to be considered too risky.
"We do accept defaults will increase and some big names will go. But for it to get really bad it would have to be at 6 per cent for the next five years."
During the Great Depression defaults were as high as 1.6 per cent for investment grade bonds and 16 per cent for higher-risk, high-yielding bonds.
The average default rate for investment grade bonds since then has been 1 per cent.
"Six per cent - for that to happen three out of the 10 largest companies wouldn't exist any more. That would be Armageddon."
Fitzpatrick said there would be more defaults in the emerging markets and high yield bonds at the more risky end of the spectrum. But Government backing around the globe of financial firms had now made them more attractive to bond investors.
"In London the talk is quite weary, quite cautious. On the ground there are job losses and that does affect moral. But investors are more optimistic and are putting their money into corporate bonds which are now partly or fully nationalised."
Fitzpatrick said a company which is fully nationalised with a Government guarantee was seeing its credit rating rocket up to AAA level as it takes on the Government rating.
Fitzpatrick predicted the global recession would run until early to mid 2009 with equity markets expected to rebound at the end of 2008 or early 2009.
"The general expectation is this will not be a 2010 story - it will be a 2009 story."
But there still remained huge risks.
"We are likely to see more fallout from the US car industry, but there are still some surprises out there."
Fitzpatrick said one big potential risk was a universal halt to consuming.
"Everybody seems to be tightening their belts a little bit more.
"We have been used to a spending spree culture for a while."
That would be a huge negative, he said.
