Markets

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

It's a corporate bond party. The U.S. had a stellar January for new sales, and issuance in euros is off to a rip-roaring start for 2017, with 161 deals totaling 172 billion euros ($185.6 billion). Yet if you filter out the high-grade noise all is not right in the state of Europe. And the European Central Bank has its fingerprints all over it.

The ultimate aim of all the ECB's herculean efforts on quantitative easing is to breathe life into the lending market, principally to those companies starved of capital. The high-yield corporate bond market provides a window into the health of capital flows for the most vulnerable borrowers, as it has a public face that's missing from Europe's bank-dominated corporate lending market. It's always been the poor relation to the much bigger U.S junk bond market, but the disparity is growing.

The Shrinking European High-Yield Market
Growth is picking up in Europe, so why isn't new bond supply?
Source: Bloomberg

U.S. high yield corporate bond sales in 2017 are so far more than triple the amount last year, with 60 percent of that in rock-bottom CCC-rated securities. So there is nothing wrong with demand and supply stateside and that can be loosely correlated with the relative health of its economy.

Yet high yield issuance in Europe for January is about 26 percent down from last year, and half the amount in 2015, according to Bloomberg data. Even investment grade corporate sales have tapered off. The recent shift higher in government bond yields seems to have encouraged pending issuers to step back and await more favorable conditions.

That's not the result you'd expect, given that the central bank has actually entered the market. The ECB now holds over 10 percent of European corporate debt outstanding, around 60 billion euros worth. Its Corporate Sector Purchasing Program is making the investment-grade corporate bond market so artificially expensive that junk-rated securities are having the time of their life. It's also perpetuating the negative yield phenomenon in the region, as it holds 67 issues that yield less than zero.

The Real Corporate Bond Story
European corporate debt sales had a choppy January, though the overall picture was healthy
Source: Bloomberg
Total issuance includes banks, supranationals, sovereigns, agencies, mutuals and covered bonds for banks. Week 5 covers Jan. 30 and 31.

For the high-yield bond market, the root of the problem problem now is that it isn't living up to its name. Yields just aren't high enough. Investing in low-rated companies is a skillset that requires a lot of due diligence, and for that extra effort and risk taken there needs to be a commensurate reward.

The ECB's well-meaning actions are actually now deterring financing in the very area it is trying to support -- financing for small- and medium-sized companies, the engine of the economy. Investor demand is very clearly still there for a juicy coupon, as can be seen from the order books for Tier 1 issues, where coupons can be around 8 percent. It's quite a different matter to buy high-risk debt that yields next to nothing. 

My Kingdom for Some Decent Yield
ECB purchases spur a wave of yield compression that leaves slim pickings for investors
Source: Bank of America Merrill Lynch

The argument for tapering its main QE vehicle, which focuses on government debt, has built up considerable steam. The case for ending corporate bonds purchases is even stronger, because it looks as if it's now having precisely the opposite effect it was designed for. The Bank of England should take heed as well, and give serious thought to ending its own program on Thursday. Let’s hope Brexit hasn’t severed communications yet.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net