Greece risk eclipsed as stimulus fosters greed in Europe’s credit markets

The battle between fear and greed in Europe’s credit markets is over as Mario Draghi’s quantitative easing ensures that not even the threat of a Greek exit from the euro is endangering risk appetite.

European companies have issued $21 billion of junk-rated bonds in a record start to the year, while UBS Group AG joined a surge in issuance of the riskiest bank bonds with a debut sale, according to data compiled by Bloomberg. Demand for high- yielding assets has pushed junk borrowing costs to a five-month low, handing investors the best year-to-date returns in three years, Bank of America Merrill Lynch index data show.

The European Central Bank’s plan to buy at least 1.1 trillion euros ($1.3 trillion) of bonds is sheltering markets from the potential consequences of Greece failing to reach an agreement with its international lenders. While Europe’s finance ministers meet Monday to discuss the country’s aid, credit markets suggest investors are reassured they will be shielded, whatever the outcome.

“If investors were really concerned about a Greek stress point, the new-issue market would be closed across the board,” said Luke Hickmore, the Edinburgh-based senior investment manager at Aberdeen Asset Management, which oversees about $504 billion. “The market seems quite happy sailing on without being too concerned about a Grexit because people expect the ECB to stem contagion.”

Junk Sales

Investors placed an additional $1.3 billion in European high-yield bond funds in the week ended Feb. 11, the biggest weekly inflow for 15 weeks, according to data compiled by Bank of America Corp.

European high-yield borrowers are taking advantage of the increased demand. French frozen food retailer Picard Groupe SAS raised 770 million euros last week by selling its first speculative-grade notes since 2013, while German elevator component manufacturer Wittur GmbH issued 225 million euros in its debut bond sale.

Banks are also seeking to benefit by selling undated debt with optional coupons that count as the highest-quality capital because they are designed to take losses without triggering a default. UBS debuted so-called additional tier 1 bonds, taking year-to-date issuance by European banks to more than 8 billion euros, Bloomberg data show.

Bailout Concessions

“The market is shrugging its shoulders,” said Aengus McMahon, London-based head of European high-yield research at ING Bank NV. “ECB stimulus mutes concern over Greece because there’s a lot of money coming in looking for yield.”

Greek Prime Minister Alexis Tsipras is trying to wring concessions from his euro-area partners after he pledged to undo the austerity imposed in his country’s bailout. While government officials said last week that negotiations were showing signs of compromise, Greece’s euro-area creditors have voiced skepticism that a breakthrough is within reach.

Weekend discussions aimed at identifying common ground failed to make sufficient progress to break an impasse between Tsipras’s government and its international creditors, German Finance Minister Wolfgang Schaeuble said in an interview with Deutschlandradio on Monday.

“There’s a risk out there, but on balance, investors are thinking they would probably be wrong to sell the market,” said Mark Holman, founder of London-based TwentyFour Asset Management, which manages the equivalent of about $6.5 billion of fixed-income assets. “Investors are taking the view that Greece will probably muddle through.”

Junk Yields

Europe’s credit markets reacted differently three years ago, when uncertainty over Greece’s euro status sent bond yields soaring. Draghi’s pledge in 2012 to do “whatever it takes” to protect the euro has soothed bond markets ever since.

Junk bond borrowing costs soared to an average 10.8 percent during the sovereign debt crisis in 2011. After Draghi’s historic pledge, rates plunged.

Yields now average 3.86 percent, on a yield-to-worst basis, or the yield investors would get if the debt were called before maturity. That’s near a record low of 3.56 percent reached in May, according to Bank of America Merrill Lynch bond index data.

“A lot of progress has been made since 2012, and if Greece were to exit, Europe would be in a better position to deal with it,” said Andrea Cicione, a strategist at Lombard Street Research in London. “Still, we can’t know what the market reaction would actually be if Greece did exit. Markets typically ignore risks until the very last minute.”