Europe Junk Bond Sales Surge to 10-Week High as Debt Risk Falls

Fiat SpA (F) and Continental AG (CON), Europe’s second-largest auto-parts supplier, led the busiest week of junk bond sales in Europe for more than two months as corporate credit risk fell this week.

Sales surged to 3.5 billion euros ($4.6 billion) this week from 500 million euros in the previous period, according to data compiled by Bloomberg. The cost of insuring European high-yield bonds against losses had dropped as much as 5 basis points to 422 basis points today, the lowest in 10 weeks, before rising to 433 at 2:27 p.m. in London.

Junk bond issuance increased after central banks from the U.S. to the U.K. to Japan signaled they plan to maintain stimulus measures. The Federal Reserve eased this week a rout in bond markets triggered after it outlined last month an eventual end of its bond-buying program. The Markit iTraxx Crossover index tied to 50 companies in Europe with speculative-grade ratings fell 23 basis points this week, the third week of declines.

“High yield was a bit oversold during the panic, and people are now getting back in as they realize that they sold too much, too quickly,” said Axel Potthof, who manages sub-investment-grade debt at Pacific Investment Management Co., which oversees the world’s biggest bond fund. “We could have maybe one more week of this and then the market will slow down for summer.”

The debt returned an average 1.09 percent this month after losing 2.14 percent in June, the biggest loss since November 2011, according to Bank of America Merrill Lynch’s Euro Non-Financial High Yield Constrained index.

Yield Drop

The average yield investors demand to hold the securities fell to 5.85 percent, the lowest since June 19, the day Fed Chairman Ben S. Bernanke said the central bank will begin scaling back quantitative easing later this year if the U.S. economy shows sustained improvement. He said this week monetary policy will remain “highly accommodative” for the “foreseeable future.”

The yield premium over benchmark government bonds narrowed to 501 basis points, the least since June 27.

“Spreads are tightening now and there is appetite again but there’s still huge volatility,” said Matthias Glueckert, Munich-based global head of debt syndicate at UniCredit SpA (UCG), which helped manage Fiat’s and Continental’s deals. “You have to listen carefully to investors at the moment and you can’t stress both size and price.”

Investors placed $848 million into European high-yield credit funds in the week to July 10, the second week of inflows, while they pulled $629 million from investment-grade funds, Bank of America analysts led by Barnaby Martin wrote in a report today.

Findus Group Ltd., the London-based frozen-food maker that restructured its debt last year, issued its first high-yield bonds to repay credit facilities, according to a person familiar with the sale.

The company that owns the Young’s Seafood brand sold 305 million euros of five-year notes that were priced to yield 9.125 percent and 150 million pounds ($226 million) of five-year bonds at 9.5 percent.

To contact the reporters on this story: Katie Linsell in Madrid at klinsell@bloomberg.net; Verity Ratcliffe in London at vratcliffe1@bloomberg.net

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

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