(Bloomberg) -- Corporate bonds are starting to look uncomfortably expensive, according to the head of fixed income at Norway's biggest bank.
“The pricing is such that there's an increasing probability for a correction,” Svein Aage Aanes, who oversees a $40 billion bond portfolio at DNB Asset Management, a unit of DNB ASA, said in an interview.
“Credit spreads are at the lowest levels since the financial crisis,” he said at his office in Bergen in western Norway. “A lot of the news around growth and the business cycle is priced in. It makes the markets more vulnerable for negative setbacks.”
Bonds issued by companies have rallied as global economic growth picks up. The Bloomberg Barclays U.S. Corporate Bond Index has risen 5.9 percent this year, with central bank purchase programs helping inflate prices already propped up by low interest rates.
“We've aligned the credit exposure a bit more defensively since the credit spreads have narrowed,” Aanes said. “We wish to have some dry powder if something happens.”
But corporate bonds remain a better investment than government debt, Aanes said. The credit cycle hasn't completely played out yet, and for investors willing to work a little harder to generate returns, “credit is still a good place to be” relative to sovereign markets, he said. DNB's Global Credit fund has returned 4.6 percent this year.
Investors now have to get really deep into the “nitty gritty,” he said. “So the big shifts with duration and credit risk on/off -- there has been little of that in the past years. It's about optimizing the portfolio and the credit exposure to squeeze out the extra basis points.”
To contact the reporter on this story: Jonas Cho Walsgard in Oslo at jchowalsgard@bloomberg.net.
To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Stephen Treloar, Tasneem Hanfi Brögger
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