Although the European high-yield bond market benefitted from significant investor interest through last year and got off to a great start in 2013, it did not escape the general downturn that affected all markets following Italy’s election deadlock last week.
Fears that the European crisis would once again raise its head caused spreads on almost all high-yield bonds to widen last week, in particular bonds from peripheral European countries such as the Spanish telecom company ONO and Italy’s Wind Telecommunications, according to Chris Brils, director and co-head of global high yield at F&C Asset Management in London.
“Once again at a time of uncertainty, credits that have pure domestic exposure to European peripheral countries are selling off and those from core Europe are being perceived as a safe haven, which shows that the European high-yield market is still very sensitive to peripheral news headlines and fearful of the European sovereign crisis overhang,” Brils said. “[But] a week from now, things could be different, and the search for yield could continue, as high-yield is really the default asset class, since it’s one of few places within the fixed income universe where you can earn some yield.”
Sure enough, it is that rationale that attracted money into high yield through 2012 and continues to bring money into high yield bond funds this year. While some are predicting marginal increases on German Bunds by the end of the year, real yields for perceived safe-haven governments continue to be negative, said Christian Weber, senior strategist, credit strategy and structured credit at Germany’s UniCredit, adding and for investment grade corporate bonds, the real yield is around zero.
“High yield will continue to attract investors, even if in absolute terms, the yields on high-yield bonds have reached historic lows. However, this has happened on the back of declining government yields while in terms of credit spread, the valuation of high yield bonds still looks fair given strong credit fundamentals, low default rates and a gradually improving economic outlook,” Weber said. And despite the temporary malaise following the Italian election news, prospects for the European high yield bond market, even if it’s a stop-and-go market, look good this year, both for investors as well as issuers, he said.
“Year-to-date, we have had close to E16 billion in high yield bond issuance from European companies, and whereas last year double-B credits made up more than half the market, this year so far we have seen a lot more single-B and triple-C issuers, which means that the appetite for risk is high and the chase for yield is very much on,” said Tanneguy de Carne, global head of high yield capital markets at Societe Generale in London. “From the investor side spreads are tighter in Europe and this is raising a few questions and concerns that this year, after the massive rally we have had last year, that investors will struggle to generate the same returns. But most professionals expect European high yield to generate returns of 6% to 8% this year.”