Company Bonds in Europe Surge as Slow Growth Spurs Rate-Cut Bets

Investors are demanding record-low yields to hold investment grade bonds in Europe amid speculation benchmark borrowing costs will be cut to counter slowing growth.

Spain’s Banco Santander SA (SAN) and Italian lender UniCredit SpA (UCG) have led a rally which has seen yields falling to 1.86 percent, Bank of America Merrill Lynch’s Euro Corporate Index shows. The cost of insuring against losses on company debt fell for a third day, with the Markit iTraxx Europe index of credit-default swaps linked to 125 investment grade companies dropping two basis points to 108.5, the lowest in almost two weeks.

Services and manufacturing shrank in the euro area for a 15th month in April, a report showed today, boosting speculation the European Central Bank will cut interest rates to spur growth. Confidence in debt from companies in the region’s most indebted countries was lifted as Spain’s recession eased in the first quarter and Italian voters re-elected President Giorgio Napolitano, who pledged to break the country’s political deadlock.

“The market is craving good news and Napolitano’s re- election is a step in the right direction,” said Juan Esteban Valencia, a strategist at Societe Generale SA in Paris. “There’s a lot of cash looking for a home in a market distorted by the central bank. Peripherals and lower-rated companies have tightened the most.”

Government Debt

Yields investors demand to hold non-financial company bonds from Europe’s peripheral nations also fell to a record 2.5 percent, Bank of America data show. The move mirrored declines on Spanish and Italian government debt. Italy’s 10-year notes dropped below 4 percent for the first time in almost 2 1/2 years, while borrowing costs for Spain and Portugal declined to the least since 2010.

Yields on Banco Santander, Spain’s biggest bank, fell an average 67 basis points this month to 2.6 percent while yields on UniCredit dropped 63 basis points to 3.8 percent.

The premium investors demand to hold European corporate bonds instead of benchmark government debt is holding at 132 basis points, the lowest since January 2008, Bank of America Merrill Lynch data show. The spread for peripheral corporate bonds narrowed to 192 basis points, approaching a 19-month low of 182 basis points reached Jan. 11.

-- Editors: Jennifer Joan Lee, Michael Shanahan

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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