Junk Premiums Drop to Lowest Since 2007 in Europe on Sales Slump

The premium investors demand to hold high-yield corporate bonds in euros rather than government debt fell to the lowest in more than six years as a dearth of new issues pushes up prices.

The spread tightened 45 basis points this month to 3.29 percentage points, the narrowest gap since July 2007, Bank of America Merrill Lynch index data show. Non-financial companies sold 1.8 billion euros ($2.5 billion) of speculative-grade debt this month, the least since August and down from 6.7 billion euros in January, according to data compiled by Bloomberg.

“We haven’t seen any significant issuance and there’s still demand for yield from institutional investors,” said Craig Veysey, head of fixed income at Sanlam Private Investments Ltd. in London, which has about $3.6 billion of assets under management in the U.K. “A lot of issuance has already been done, company balance sheets are relatively strong, so there isn’t necessarily the need to issue.”

Corporate borrowers raised a record 74 billion euros from high-yield bond sales last year as the European Central Bank cut benchmark rates to record lows to stimulate the economy. That allowed indebted companies to refinance and stave off bankruptcy, with Moody’s Investors Service’s European default rate falling to 4.1 percent last month from 4.2 percent in December.

The cost of insuring high-yield bonds against losses has declined to the lowest since July 2007, with the Markit iTraxx Crossover Index of credit-default swaps on 50 European companies with speculative-grade ratings falling to 264 basis points at 10:05 a.m. in London.

Yield Gap

The average yield premium investors demand to hold junk-rated bonds rather than investment-grade bonds has also declined to the lowest since 2007. The spread has narrowed 24 basis points, or 0.24 percentage points, this month to 2.6 percentage points, according to Bank of America Merrill Lynch index data.

In credit markets today, Hella KGaA Hueck & Co., German lighting manufacturer is selling 300 million euros of bonds maturing September 2017, a person familiar with the matter said. The Lippstadt-based company is rated Baa2, or two levels above junk, by Moody’s, according to data compiled by Bloomberg.

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