Europe’s riskiest debt proves haven for buyers
Europe’s riskiest corporate borrowers are proving a haven for bond buyers who are more skittish about facing losses from rising interest rates in the U.S. than defaults in the region’s periphery.
Investors funneled $113.6 million into European high-yield bond funds in the week ended July 31 while yanking $567.3 million from similar funds in the U.S., EPFR Global data show. Euro-denominated speculative-grade notes have gained 0.45 percent since the end of April as funds received a net $82.8 million of deposits, while dollar-denominated debt declined 1.47 percent with investors pulling $3.7 billion.
Less than two years after the economies of Spain, Greece, Ireland, Portugal and Cyprus required bailouts, investors are gravitating to euro-denominated corporate debt as they seek refuge from rising U.S. Treasury yields. While euro-area policy makers are maintaining stimulus efforts in the face of a recession, U.S. central bankers are debating when to end their bond purchases as America’s economy improves.
“Europe is behind the curve in terms of growth,” said Umang Vithlani, head of credit at Fideuram Asset Management in Dublin, which oversees 3 billion euros ($3.98 billion.) “It makes sense for the ECB to wait and see the impact of Fed measures and then if required provide further flexibility.”
Investors are seeking ways to avoid losses with 10-year Treasury yields at 2.6 percent, up almost a percentage point from this year’s low on May 2, as Fed officials consider slowing $85 billion of monthly bond purchases before year-end.
While junk bonds historically have been more insulated from rising rates than investment-grade debt, concern is mounting that this time is different after a rally during which relative yields contracted by 13.5 percentage points since the end of 2008.
Fixed-income buyers are gravitating toward euro-denominated debt as corporate borrowers from French automaker PSA Peugeot Citroen to builder Vinci SA say the worst is over for the region’s economy.
Even as European credit funds receive deposits, “U.S. outflows are back for both high-grade and high-yield retail funds,” Bank of America credit strategists Barnaby Martin and Ioannis Angelakis wrote in an Aug. 2 report. “Globally, this shows how sensitive retail investors in credit are to interest- rate changes at the moment.”
Elsewhere in credit markets, the extra yield investors demand to hold investment-grade corporate bonds globally rather than government debentures decreased for a fourth week. The cost of protecting U.S. company debt from default declined for the fifth time in six weeks. Global bond sales fell for a second week.
Relative yields on bonds from the U.S. to Europe and Asia contracted 2 basis points last week to 148 basis points, or 1.48 percentage points, according to the Bank of America Merrill Lynch Global Corporate Index. Yields rose to 2.974 percent from 2.959 percent on July 26.
The Bloomberg Global Investment Grade Corporate Bond Index has lost 0.02 percent this month, bringing losses for the year to 2.55 percent.
Bonds of New York-based Goldman Sachs Group Inc. were the most actively traded dollar-denominated corporate securities by dealers last week, accounting for 2.8 percent of the volume of dealer trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Halliburton Co. led $45.7 billion of corporate bond sales worldwide last week, a 26 percent decline from $62 billion in the period ended July 26, according to data compiled by Bloomberg. The Houston-based energy services provider raised $3 billion in a four-part offering on July 29. Its $1.1 billion of 3.5 percent, 10-year notes fell 0.098 cent from the issue price to end the week at 99.668 cents on the dollar to yield 3.54 percent, Trace prices show.
The Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreased 1.8 basis points to a mid-price of 72.7 basis points, according to prices compiled by Bloomberg. The gauge has declined from this year’s high of 97.6 on June 24.
In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 6.2 to 96. In the Asia- Pacific region, the Markit iTraxx Asia index of 40 investment- grade borrowers outside Japan fell 2 basis points today to 143 as of 8:47 a.m. in Singapore, Westpac Banking prices show.
The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10 million of debt.
The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index decreased 0.05 cent to 98.24 cents on the dollar. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has returned 3.22 percent this year.
Leveraged loans and high-yield bonds are graded below Baa3 by Moody’s Investors Service and lower than BBB- at S&P.
In emerging markets, relative yields widened 10 basis points to 342 basis points, according to JPMorgan Chase & Co.’s EMBI Global index. The measure has averaged 299.6 this year.
High-yield bond funds in Europe have received a net $2.4 billion into this year while investors pulled $704 million from speculative-grade funds in the U.S., EPFR Global data show.
Euro-denominated junk notes returned 2.1 percent last month, 0.2 percentage points more than gains on similar debt in the U.S., Bank of America Merrill Lynch index data show.
European figures and sales “appear to show that the market has hit its bottom in the first half,” said Jean-Baptiste de Chatillon, the chief financial officer of Peugeot, which reported a smaller operating loss for the second quarter than analysts estimated.
“Signs are that we have touched bottom and are recovering,” said Xavier Huillard, chairman and chief executive officer of Vinci, Europe’s biggest construction company and operator of toll roads.
Euro-denominated speculative-grade bonds lost 2.5 percent in 2011 as concern grew that policy makers would be unable to reign in spiraling borrowing costs, which prevented Ireland and Portugal from being able to borrow.
Created in 2010, the European Financial Stability Facility has disbursed cash this year to Portugal and Greece, according to its website. While economists surveyed by Bloomberg expect the euro-area economy to contract by 0.6 percent in 2013, they predict it will grow by 1 percent next year.
European Central Bank President Mario Draghi has pledged to keep interest rates low for an “extended period” in a bid to encourage a recovery. He said on Aug. 1 that economic indicators signal the euro region is past the worst after euro-area manufacturing unexpectedly expanded in July for the first time in two years.
“The recent data in the euro area has been rather good,” said Christoph Kind, the head of asset allocation at Frankfurt Trust in Frankfurt. “The ECB could argue that the data are proof that the expansive monetary policy is bearing fruit, but it’s by no means the time to change their guidance.”
Fed Chairman Ben S. Bernanke helped trigger a selloff in the U.S. corporate-bond market after telling Congress on May 22 that sustainable labor-market progress could prompt policy makers to scale back monthly bond purchases in their next few meetings. The nation’s economy is expected to expand 1.8 percent this year and 2.7 percent in 2014, according to economists surveyed by Bloomberg.
Investors yanked $13.5 billion from U.S. high-yield bond funds in June as yields on 10-year Treasuries rose as high as 2.74 percent on July 5, the highest level since August 2011, EPFR data show. European funds reported $1.1 billion of withdrawals that month.
“The rates market has likely been the most important driver of both credit flows and performance,” New York-based credit analysts at Morgan Stanley wrote in an Aug. 2 report. “Yields and carry are low, and hence there is a smaller buffer today to offset any rise in rates.”
Spreads on dollar-denominated junk bonds have shrunk to 4.74 percentage points as of Aug. 2, or 1.2 percentage points lower than the 10-year average, Bank of America Merrill Lynch index data show.
Yields on junk notes in the U.S. have plunged to 6.66 percent, compared with 9.11 percent on average over the past decade, the data show.
“As interest rates continue to creep upwards, many investors looking to high-yield bonds for income may find better alternatives in less risky asset classes,” said Adam Longenecker, an analyst at EPFR.
[Bloomberg]
