Junk Bonds Return Most in Four Months as Supply Wanes in EuropeJohn Glover
High-yield bonds in Europe handed investors the biggest gains in four months as issuance dwindled during the slowest February since 2010.
The debt returned 1.56 percent this month, the most since October, Bank of America Merrill Lynch index data show. Companies including ThyssenKrupp AG, Germany’s biggest steelmaker, and chemicals maker Ineos Group Holdings SA, sold 4.1 billion euros ($5.6 billion) of junk bonds in euros and pounds, according to data compiled by Bloomberg.
Bond prices are rising as the European Central Bank keeps interest rates at record lows and economists predict looser monetary policy. Issuance is slowing because many companies raised funds last year and there’s a resurgence of high-yield loan sales, according to Stuart Stanley, a fund manager at Invesco Asset Management in London.
“The issuance situation may get worse before it gets better,” said Stanley, who helps oversee about $3.1 billion in high-yield credit. “We’re looking at the potential disappearance of a number of bonds as refinancings leak into the loan market.”
The leveraged loan market may expand by about 35 percent this year to 100 billion euros, according to Credit Suisse Group AG data.
Demand for high-yield debt returned this month as concerns a slowdown in emerging-market economies will curb global growth subsided, according to Roger Francis, an analyst at Mizuho International Plc in London. A decline in the number of corporate failures globally is also boosting confidence, with the number of defaults this past year matching 2011 and 2007 as being the lowest in 18 years, Standard & Poor’s said in a statement yesterday.
The cost of insuring high-yield bonds against losses dropped to the lowest in 6 1/2 years, with the Markit iTraxx Crossover index of credit-default swaps on 50 companies with speculative-grade ratings falling 52 basis points this month to 264 basis points at 10:24 a.m. in London, the biggest monthly drop since October.
“Volatility is down, equities are up and spreads are getting tighter,” said Francis. “It’s a happy time for credit. There’s good demand, only partially met by supply.”
The average extra yield investors demand to hold high-yield securities in euros instead of government bonds fell 45 basis points this month to 3.29 percentage points, the lowest since July 2007, according to Bank of America Merrill Lynch index data. The yield on the debt dropped to a record 4.45 percent, the data show.
Tier 1 Issuance
Shrinking supply from non-financial companies is fueling appetite for the riskiest bonds issued by banks. Banco Santander SA, Spain’s biggest lender, and Danske Bank A/S, Denmark’s largest bank, are planning to sell additional Tier 1 securities in euros, according to people familiar with the deals, while the U.K.’s Nationwide Building Society intends to market the first pound-denominated issue of the debt.
Additional Tier 1 notes offer higher yields than conventional bonds because they comply with new European Union rules designed to make investors, rather than taxpayers, contribute to a bank’s financial rescue.
Banco Bilbao Vizcaya Argentaria SA, Spain’s second-largest lender, held its second issue of the securities this month, issuing 1.5 billion euros of 7 percent notes that now yield 6.97 percent, according to Bloomberg generic prices. The Bilbao-based bank opened the market in April with a sale of $1.5 billion 9 percent notes that now yield 8.79 percent.
“People are buying AT1 because there isn’t much else to buy,” said Alex Moss, a senior credit analyst at Insight Investment Management in London, which manages more than $450 billion. “Supply has been poor.”