Executives who run big companies and big funds expect to be dealing with sovereign debt problems for years to come.
That's one of the big conclusions from a survey of executives commissioned by Royal Bank of Canada's capital markets unit.
Some of the most striking findings were a high degree of concern that a Group of Twenty country would default in the coming three years (Italy was voted most likely), skepticism that the euro-zone would survive that period intact, and a belief that high quality corporate bonds might be safer than some government bonds.
A full 40 per cent of respondents said that they expected yields on the highest level of corporate debt to drop below yields on sovereign debt of the countries where they are based, according to the poll of about 440 executives around the world.
That's a big shift, given that for years corporate bonds have traded at higher yields than so-called government benchmarks to reflect the higher risk that a company would default. But now, with the survey showing that 30 per cent of the respondents saying there is at least a 1 in 2 chance that one of the G20 would default on its debt in the next three years, that's changing.
"That's totally against what the textbooks would tell you," said Richard Talbot, co-head of global research at RBC's capital markets arm.
While it may be a "transitory" phenomenon to have corporate yields trade below government yields, Mr. Talbot said some "investors are saying they'd rather be closer to the earnings and the cash flow [by owning corporate debt] rather than owning debt up at levels where there are some legitimate concerns about the tax levels and the budget deficits that some countries are running and whether these are sustainable or whether we're living on borrowed time."
Given the concern, corporate executives are very careful about big decisions such as acquisitions, according to the survey. About half of respondents said they expect an increase in transaction volumes.
Given that they have lots of cash and few plans to make purchases, only 38 per cent of corporate respondents expected to raise fresh capital in the next two years.
"This tells us that there is not a lot of visibility in the economy and the geopolitical situation," said Mr. Talbot. "In that environment, with corporates blessed with having a fair amount of cash, they are likely to want to protect that."
(For more on this, RBC has produced a podcast.)