Junk Bond Rally Loses Steam in Europe as Global Sell-Off Deepens

Europe, the only positive area for the global high-yield market this month, is succumbing to a global sell-off.

Junk bonds in Europe lost 0.44 percent since July 21, according to Bank of America Merrill Lynch index data. The securities returned about 1 percent this month, the most since February, as comparable global benchmarks suffered losses.

Slumping oil prices, wild gyrations in Chinese equities and concerns that the U.S. Federal Reserve is moving closer to raising interest rates reversed a European rally that had been triggered by improvements in the Greek debt crisis. Investors withdrew $1.4 billion from high-yield bond funds globally in the week through July 29, the most in four weeks, Bank of America Corp. said in a report on Friday.

“There was a thought that after Greece was solved the pressure on the market would relax, but there is always something,” said Sabur Moini, a money manager in Los Angeles at Payden & Rygel, which oversees about $85 billion in fixed-income assets. “The pressure on U.S. high yield has been fast and intense.”

Junk bonds in the U.S. lost 0.6 percent in July, while global high-yield lost 0.3 percent and Asian securities were little changed, Bank of America Merrill Lynch index data show. The sell-off deepened in the second half of the month, with global bonds losing 0.5 percent since July 15.

Europe’s rally is also reversing in the credit-default swaps market. The Markit iTraxx Europe Index insuring speculative-grade debt rose to 286 basis points from a three-month low of 260 basis points on July 20, paring its first monthly decline since February.

“Although we did have some degree of positive momentum post the announcements around the Greece agreement, it was fairly short-lived,” said Srikanth Sankaran, head of European credit and asset-backed securities strategy at Morgan Stanley in London. “Emphasis has shifted to other factors. They are playing a role in limiting the optimism that investors take into the summer.”

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