Treasuring European Junk Bonds
As central banks across the world suppress interest rates, many investors are taking on credit and duration risk in a quest for yield. The collapsing yields on European junk bonds suggest that the continent has resolved many of its economic and political issues. We suspect that these problems are more fundamental and that there will be further reckoning over the intermediate- to long-term.
Speculative grade borrowers from carmaker Renault SA to French phone equipment manufacturer Alcatel-Lucent and Portugal’s Telecom SGPS SA are paying an average 3.25 percentage points more to borrow than the safest debt issuers, Bank of America Merrill Lynch data show. The premium has shrunk from a peak of 20.7 percentage points in March 2009.
The riskiest corporate bonds are rallying along with government debt and the euro as the region’s fiscal crisis and threat of a currency break-up recedes. European Central Bank President Mario Draghi has expressed a greater willingness than his predecessor, Jean-Claude Trichet, to use the ECB’s resources to bolster the financial system. “Given the relatively low defaults we’re experiencing, investors will continue to be enticed in to riskier names,” said Thomas Rahman, a credit strategist at Ria Capital, an Edinburgh-based fixed-income broker. “They’re looking at it on a relative basis and I expect there’s room for further tightening” in yield premiums, he said.