Junk Bond Sales Setting July Record in Europe as Returns Recover

High-yield debt issuance is surging to the busiest July on record as Europe’s economy shows signs of recovery a year after European Central Bank President Mario Draghi promised to do “whatever it takes” to save the euro.

Italian automaker Fiat SpA led 6.2 billion euros ($8.2 billion) of speculative-grade sales, up 55 percent from June, according to data compiled by Bloomberg. After two months of losses, the securities are handing investors 1.9 percent in July, beating the 0.7 percent return from non-financial investment-grade securities, Bank of America Merrill Lynch index data show.

Euro-area manufacturing unexpectedly expanded in July for the first time in two years adding to signs the currency bloc’s economy is emerging from a record-long recession. The average yield investors demand to hold junk bonds fell 42 basis points so far this month to 5.68 percent, near the lowest in seven weeks, Bank of America Merrill Lynch index data show.

“Economic data in Europe is turning more positive and company earnings remain benign,” Barclays Plc analysts Soren Willemann and Zoso Davies in London wrote in a note to investors. “Our base case remains that spreads will grind tighter over the summer.”

‘Sweet Spot’

Investors placed $9.8 billion in European high-yield credit funds this year and $4.5 billion in high-grade funds, Bank of America Corp. analysts led by Barnaby Martin wrote in a report today. Non-financial companies sold 45 billion euros of junk-rated securities in euros and pounds, the most for the year-to-date period, data compiled by Bloomberg show.

“Investors are still seeing, in spite of a year that’s been quite volatile, positive total returns and attractive yields,” said Chris Higham, a fund manager at Aviva Investors Ltd. in London, which manages more than 60 billion pounds ($92 billion) in credit globally.

The cost of insuring European corporate debt against default is heading for its first monthly decline since April, signaling improvement in perceptions of credit quality.

The Markit iTraxx Crossover Index of default swaps on 50 companies with mostly high-yield credit ratings, which was down 6.75 basis points at 408.6 at 11:10 a.m. in London, dropped 68 basis points so far in July. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 1.75 to 101.5 today, and is down 17 basis points on the month.

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.

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