Junk Bonds of the Financial Crisis Were the Decade’s Biggest Winners

  • ‘Great irony’ is strong performance of major assets: Deutsche
  • Still, most commodities except gold disappointed with 50% loss

Sowing the Seeds of the 2007 Financial Crisis

If you’d bought European high-yield bonds the day the global financial crisis erupted, closed your eyes and held onto them through the unprecedented events of the following decade, you would now be sitting on a 100 percent return.

On the other hand, if you’d put your money in most major commodities, other than gold, you would have lost 50 percent. The euro and European stocks would have handed you a loss, but most bond markets, U.S. stocks and the dollar would have been a good bet.

Bond markets subsidized by the world’s largest central banks with asset-purchase programs that swelled to almost $14 trillion may help explain why debt to Europe’s most leveraged companies came out on top. With European Central Bank President Mario Draghi promising to do “whatever it takes” to hold together the euro zone, investors were emboldened to lend to the riskiest companies while yields on government debt turned negative.

Healthy returns in major global assets -- including those that helped spark the financial crisis -- are among the “great ironies” of the past decade, Jim Reid, global head of credit strategy at Deutsche Bank AG, said in a research note last week.

Of course, the moves weren’t straight up. The euro tumbled 14 percent and the S&P 500 lost as much as 57 percent from its 2007 record before tripling in the eight years starting in 2009. The Bloomberg Barclays Pan-European High Yield Index lost 38 percent in 2008.

Yet covered bonds, which are backed by pools of assets including mortgages, posted positive returns every year of the past 10, ending the decade 47 percent higher, according to Bank of America Merrill Lynch index data.

The market meltdown that hobbled banks from Citigroup Inc. to Royal Bank of Scotland had its unofficial start in August 2007, when BNP Paribas SA suspended three investment funds with exposure to U.S. subprime mortgages.

— With assistance by Anooja Debnath

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