Corporate Bond Yield Premiums Fall in Europe as Offerings Slow

Yield premiums on corporate bonds in Europe dropped to the lowest in more than a month this week before a report showed U.S. employment rose in July. Note sales slowed.

The extra yield investors demand to hold investment-grade company bonds in euros rather than government securities fell to 107.2 basis points this week, the lowest since June 19, according to Bloomberg bond index data. A U.S. payrolls report showed employers added 162,000 workers in July, below the 185,000 forecast in a Bloomberg survey of 93 economists.

Federal Reserve officials, debating whether to trim bond purchases meant to boost growth and cut the jobless rate, said earlier this week the labor market has shown “improvement.” High-grade bond yields fell from an eight-month high reached in June as the European Central Bank and Bank of England indicated they would continue stimulus measures and Fed Chairman Ben S. Bernanke said there’s no fixed schedule for slowing stimulus.

“There’s a more benign backdrop to the market than last month,” said Hans Lorenzen, a credit strategist at Citigroup Inc. in London. “Supportive language from the Bank of England and the European Central Bank, and even the Fed, has reduced yield-related concerns in risk assets. Until we see a pick-up in issuance or a more tangible negative catalyst, we expect spreads to tighten further.”

Unilever (UNA), the world’s second-biggest consumer-goods maker, was among companies selling 4.8 billion euros ($6.3 billion) of bonds this week, the least this year and below the weekly average of 13.4 billion euros for 2013, according to Bloomberg data.

New Issuance

The European Investment Bank sold 500 million euros of 17-year bonds today, according to a person familiar with the deal who asked not to be identified because it’s private. The notes were rated Aaa by Moody’s Investors Service and priced to yield 25 basis points more than the mid-swap rate, the person said.

In the high-yield bond market, Italian gaming machines operator Gruppo Cogemat SpA is marketing 165 million euros of bonds to yield about 10 percent to 10.25 percent, a person familiar with the matter said yesterday.

The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings has fallen 4.5 basis points this week to 97.4. The gauge rose 0.6 basis point today. The Markit iTraxx Crossover Index of default swaps on 50 high-yield companies rose 2.3 basis points to 400.5 today, reducing the weekly decline to 10.9 basis points.

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

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

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

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