Companies from Europe’s weakest nations are selling more bonds than at any time in the past three months as borrowers tap investors’ growing appetite for higher-yielding assets.
Spain’s Telefonica SA helped boost issuance from the euro-area’s peripheral countries to 6.3 billion euros ($8.4 billion), the busiest week since Oct. 7, data compiled by Bloomberg show. Sales across Europe reached 18.4 billion euros this week, led by Deutsche Telekom AG and Deutsche Bank AG.
Bond buyers are snapping up riskier alternatives to the ultra-low rates on safer corporate securities even as Europe’s economy continues to sputter. While European Central Bank members voted unanimously to keep rates at a record low yesterday, President Mario Draghi said policy makers saw few signs of an early economic recovery.
“We’re seeing a wall of new credit being issued on a daily basis, in my opinion at relatively unattractive rates,” Neil Dwane, chief investment officer for Europe at Allianz Global Investors, said on Bloomberg Television’s “The Pulse” with Francine Lacqua and Guy Johnson. “Credit fund managers have loads of money and they have to invest it, but that tends to not be a good investment strategy.”
Investor demand for peripheral company bonds has pushed yields on the debt down to a record 2.56 percent, Bank of America Merrill Lynch’s Euro Periphery Non-Financial Index shows. That’s still 100 basis points more than notes issued by companies in Europe’s core nations including Germany and France.
Telefonica’s 1.5 billion euros of 3.987 percent 10-year bonds yield 221 basis points more than the benchmark swap rate, down from their Jan. 8 issue spread of 230 basis points, data compiled by Bloomberg show. The yield gap on Barcelona-based Gas Natural SDG SA’s 600 million euros of 10-year securities sold Jan. 9 narrowed 21 basis points to 209.
In today’s deals, Spanish utility Red Electrica Corp. SA raised 400 million euros from nine-year bonds at a spread of 223 basis points, its first note sale since September, Bloomberg data show.
Portugal’s Caixa Geral de Depositos SA issued the country’s first euro-denominated covered bonds since August, while Spain’s Banco de Sabadell SA in Spain sold similar securities, which are backed by loans and guaranteed by the issuer.
Demand for debt from Europe’s second tier of nations has extended to sovereigns, with two-year Spanish and Italian bond yields dropping to the lowest since 2010 yesterday. Spain’s 10-year debt fell to a 10-month low after the country exceeded its target at its first debt auction this year.
“There is still a long way to go before we can call the end to the sovereign crisis, but what the ECB has done is quashed the tail risk,” said Harpreet Parhar, a credit strategist at Credit Agricole SA in London. “With yields so incredibly low investors have had to hunt around for juice, and in investment-grade it’s only peripherals and some banks.”
In credit derivatives, the Markit iTraxx Crossover Index of credit-default swaps linked to 50 companies with mostly high-yield credit ratings declined one basis point to 422, down from 428.5 at the start of the week. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell one basis point this week to 102.
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.