Junk Yields Surpass 10% as Growth Slowdown Halts Bond Sales: Euro Credit

Junk-rated European company bond yields climbed above 10 percent for the first time in a year as investors demand more compensation for the region’s stalling economic growth.

According to Bank of America Merrill Lynch’s Euro High-Yield Constrained Index, yields on speculative-grade debt climbed to as high as 10.1 percent on Aug. 11, the most since June 2010 and 2 percentage points up on the start of this month. That’s double the rate on Italian and Spanish 10-year government debt after the European Central Bank bought the securities to bring down yields to contain Europe’s sovereign crisis.


Borrowers unwilling to pay the higher premiums demanded by investors as the risk of recession looms means there have been no new junk bond sales in Europe since July 26, according to data compiled by Bloomberg. Gross domestic product in the 17- nation euro region rose 0.2 percent in the second quarter, the worst performance since it emerged from recession in 2009.

Deteriorating Conditions

The extra yield buyers demand to own junk bonds instead of benchmark German bunds has almost doubled in the past four months as investors seek havens for their cash, Bank of America Merrill Lynch data show. The spread is at 816 basis points, or 8.16 percentage points, up from this year’s low of 476 basis points on April 11.

According to data compiled by Bloomberg, the world’s biggest brickmaker raised 100 million euros ($143 million) from a sale of 5.25 percent bonds on June 21 priced to yield 279 basis points more than German government debt.

Austerity Bites

Confidence in junk-rated debt is deteriorating as nations such as Italy and Spain tackle the debt crisis by implementing austerity measures that may hamper economic growth and hurt companies’ ability to pay debt.

Corporate defaults in Europe could rise as concerns so- called peripheral countries will be unable to pay their debt seeps into the region’s financial system, Moody’s said in an Aug. 8 report. The ratings firm estimates the global default rate may increase to 1.8 percent in 2012 from 1.5 percent at the end of 2011 while the risk of recession persists.

Returns Erased

Speculative-grade bonds lost investors 1.1 percent this year after forfeiting 5.2 percent since the end of July, according to Bank of America Merrill Lynch data. That’s after the securities earned 14.7 percent last year and a record 76.4 percent in 2009.

European-based mutual funds reduced holdings of high-yield bonds for the first month this year in June, pulling 1.1 billion euros out of junk-rated debt, according to Fitch Ratings. That compares with a net inflow of 5.1 billion euros in the first half. Funds added 290 million euros of investment-grade debt in June after cutting 230 million euros in May, Fitch said.

“Prior to the most recent resurgence of the eurozone crisis we’ve seen both quality companies and companies in much more challenged circumstances managing to get deals done,” said Norval Loftus, chief investment officer at Allegra Investment Management Ltd. in London. “That second type of company is going to find it much more difficult to obtain financing even at significantly higher spreads.” (Bloomberg)