Safest Euro Bonds Punish Investors With Worst Returns Since 2006

Top-rated corporate bonds in Europe are poised to hand investors the worst returns since 2006 as record-low central bank rates accelerate a shift toward riskier debt.

Notes from companies including Johnson & Johnson, the AAA-rated maker of health-care products, and Nestle SA, rated AA by Standard & Poor’s, returned 0.8 percent this year compared with 8.3 percent in 2012, according to Bank of America Merrill Lynch index data. The extra yield investors demand to hold the debt instead of government bonds widened 8 basis points this year to 79 basis points, the data show.

“With interest rates so low this year investors bought assets with higher yields while selling higher-quality, lower-yielding products,” said Rik Den Hartog, a portfolio manager at Kempen Capital Management in Amsterdam. “That’s why credit spreads have widened for top-rated notes and you end up with a relatively weak return.”

Investors are moving from high-grade bonds to junk debt as European Central Bank policy makers pledge to keep benchmark rates at all-time lows to strengthen the region’s fledgling economic recovery. Bondholders placed $1 billion into European investment-grade credit funds this year compared with $24 billion in high-yield portfolios, according to Bank of America.

That’s shrunk the gap between what investors demand to hold bonds rated AAA to A instead of government debt and the spread for high-yield securities rated BB+ and below to 304 basis points, the narrowest in 2 1/2 years, Bank of America Merrill Lynch index data show.

The worst performer among top-rated issuers in Europe is AT&T Inc., the largest U.S. phone company. The Dallas-based borrower’s 3.55 percent notes maturing December 2032 fell from 104 cents on the euro to 96.5 cents this year, according to data compiled by Bloomberg.

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