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High-Yield Bond Rally Heads for Seventh Week on Europe Stimulus

Junk bonds are rallying for a seventh week, the longest streak since January, amid confidence that European central banks will maintain stimulus measures even as the economy emerges from recession.

The extra yield investors demand to hold speculative-grade securities rather than government debt declined 12 basis points to 382 basis points this week, according to Bloomberg bond index data. The spread has narrowed 62 basis points this year, the data show.

The European Central Bank is showing few signs of paring stimulus measures in the euro area even after Europe’s two largest economies helped to pull the region out of its longest recession. ECB President Mario Draghi has described progress in the region as “tentative” and pledged to keep interest rates at their lowest levels for an “extended period.”

“It’s too early for the European data to be a game changer” said Nick Burns, a credit strategist at Deutsche Bank AG in London. “We need to see if there will be a continued improvement,”

Moody’s Investors Service lowered its forecast for the global speculative-grade debt default rate to 3 percent for 2013 from last month’s projection of 3.1 percent, the ratings company said in an Aug. 9 report. Junk, or high-yield, securities are rated below BBB- by Standard & Poor’s and Baa3 by Moody’s.

“In a low-default world investors are still going to be searching for yield, so they will continue to be attracted to the high-yield space,” Burns said.

Bonds of New World Resources Plc are leading gains among high-yield securities in Europe today, returning as much as 4.5 percent and reducing year-to-date losses to 54 percent, according to Bloomberg bond index data. The Czech coking-coal producer’s 7.875 percent notes due January 2021 have gained 26.5 percent so far in August, the index show.

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