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Too late now to hedge risks, $16 billion credit manager says

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If you didn’t already start hedging against the risk of a deep sell-off in credit markets last month, don’t bother now.

Ville Talasmaki, who helps manage about $16 billion of credit investments for Finnish financial group Sampo Oyj, says the warning signs had been plain for a while.

“There’s not much you can do to hedge yourself against the crisis anymore,” Talasmaki said by phone. “All the wise decisions should have been made in February and before that when you had all the warning signs and red flags waving in front of you.”

With panic setting in as the fallout of the coronavirus spreads, the market appears no longer to be functioning rationally. As a result, good-value corporate bonds have been being dumped indiscriminately, Talasmaki said.

For the risky end of the debt market -- high-yield bonds and leveraged loans -- “it’s brutal out there; overall, the picture is one in which “you’ve thrown out the baby with the bath water,” Talasmaki said.

Now, with historic stimulus packages unveiled by the European Central Bank and the Federal Reserve, there are signs that sentiment is improving. For higher rated credits in particular, the panic appears to have subsided.

“As long as the liquidity backstop by the ECB is credible, then the risk is low for this to become a full-blown risk or a catastrophe in Europe,” Talasmaki said.

The next step as an investor is to be ready to buy when the recovery sets in.

“History has taught us that the first investments after the crisis are the best ones,” Talasmaki said. “Ones where the issuer is forced to pay a higher price, a premium, for accessing the market.”

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