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Junk Bond Returns Slump on Europe Sales Glut as High-Grade Loses

Junk bonds in Europe headed for the lowest monthly gains since May, and high-grade debt was poised for its first loss in seven months, amid signs the market is getting indigestion after a surge in sales.

Speculative-grade bonds in euros handed investors 0.66 percent this month, the lowest return since losing 2.3 percent in May, according to Bank of America Merrill Lynch’s Euro High Yield Constrained Index. Investment-grade notes shed 1.2 percent, the first losses since June and the biggest decline since November 2011, the U.S. bank’s Euro Corporate Index shows.

Junk-rated, non-financial companies sold 6.8 billion euros ($9.2 billion) of bonds in January, the most ever for the month, data compiled by Bloomberg show. The cost of insuring against default on this debt jumped to the highest all year as bondholders seeking higher-yielding investments hedged against losses on their purchases.

“We’ve seen signs of indiscriminate risk appetite where some people will buy anything because it’s the only yield game in town,” said Simon Ballard, a senior credit strategist at National Australia Bank in London. “The market’s balked a little bit at some of the weaker, tightly priced opportunistic transactions and the risk now is when everyone wakes up to this we could see a risk-averse panic reaction in the market.”

Debt Risk

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly speculative-grade ratings rose to 443 basis points as of 5:15 p.m. in London, from 439 yesterday. That’s also up from 419 basis points at the end of last week and 438 on Jan. 2, according to prices compiled by Bloomberg.

Credit-default 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. A basis point on a contract protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year.

Unitymedia Hessen GmbH & Co. KG’s 500 million euros of 5.125 percent bonds dropped 2.1 percent since they were sold on Jan. 16, Bloomberg data show. The price of the German medical equipment maker Fresenius SE & Co’s 2.875 percent bonds fell 1.1 percent since Jan. 10. That deal offered the lowest coupon among high-yield issues this year.

Swedish security company Securitas Direct AB added 100 million euros to its existing junk floating-rate notes due September 2018, Bloomberg data show. High-yield debt is graded below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s and Fitch Ratings.

Investment-grade debt sales totaled 22.5 billion euros this month, the most since January 2009, Bloomberg data show. The biggest deal was Telefonica SA’s 1.5 billion-euro issue of 10-year notes on Jan. 8 and that’s now the worst-performing among corporate notes sold this year, dropping 4.59 euro cents to 95.41, Bloomberg prices show.

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