Greece Debt Woes Fading in Europe’s Rebounding Junk Bonds: Credit Markets
Relative yields on Europe’s junk bonds are poised to fall below their U.S. counterparts for the first time since June 2008 as concern the sovereign deficit crisis will derail the region’s economic recovery recedes.
The extra yield investors demand to hold speculative-grade corporate bonds issued by European companies instead of benchmark government debt has declined to 656 basis points, or 6,56 percentage points, compared with 649 basis points in the U.S., according to Bank of America Merrill Lynch indexes. The 7 basis-point gap is down from 131 basis points on June 15.
Yield spreads shrinking faster in Europe than in the U.S. underscore optimism that Greece is bringing spending under control, allowing it to receive the second part of a 110 billion-euro ($145 billion) bailout this week. Economists forecast that a report tomorrow will show U.S. payrolls fell for a second month, adding to evidence the world’s largest economy is sputtering.
«People were gearing themselves up for another recession» in Europe «in the near-term and this fear has abated,» said Theodore Stamos, co-head of credit at Investec Asset Management in London, where he helps manage $70 billion. «It’s hard to see what might cause people to panic again anytime soon.»
Stamos said he favors high-yield debt issued by European cable companies as well as recent new issues from Colchester, England-based hospital and nursing-home operator Care U. K. Plc and auto-parts supplier Continental AG of Hannover, Germany. Junk bonds are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.
Junk Bond Returns
Europe’s junk bonds have returned 5,15 percent since June, led by Eircom Group Ltd., Ireland’s largest phone operator, and Commerzbank AG unit Eurohypo AG, Bank of America Merrill Lynch’s Euro/Sterling Currency Fixed-Floating Rate High Yield Index shows. High-yield debt in the U.S. gained 3,87 percent.
Elsewhere in credit markets, the extra yield investors demand to own company debt instead of government bonds fell 1 basis point to 175 basis points, the lowest since May 18, Bank of America Merrill Lynch’s Global Broad Market Corporate Index shows. Average yields rose 1,9 basis point to 3,724 percent.
Corporate bond sales climbed 17 percent through yesterday from the same period last week. Global issuance rose to $39,8 billion this week, compared with $34 billion in the three days ended July 28, according to data compiled by Bloomberg.
China Stress Tests
Volkswagen AG plans to sell U.S. dollar-denominated debt in a benchmark offering of 3- and 10-year notes as soon as today, according to a person familiar with the transaction who declined to be identified because terms aren’t set. A benchmark sale is typically at least $500 million.
Dollar bonds sold by Country Garden Holdings Co., the Chinese property developer controlled by billionaire Yang Huiyan, fell on their first day of trading after a regulator told banks to gauge the risk of a plunge in real-estate prices.
Country Garden sold $400 million of 10,5 percent five-year notes yesterday in its second sale of dollar bonds in less than four months, according to data compiled by Bloomberg. The securities were priced at 99,052 cents on the dollar to yield 10,75 percent and slipped to 98,6 cents to yield 10,9 percent in Hong Kong today, Credit Agricole CIB prices show.
The China Banking Regulatory Authority told banks to stress test for home prices dropping as much as 60 percent in some cities and warned some developers may run out of cash, a person familiar with the matter said.
Credit-Default Swaps
The cost of insuring against losses on U.S. and European corporate bonds rose, according to traders of credit-default swaps.
The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, climbed 2,1 basis points to a mid-price of 101,6 basis points as of 11:45 a.m. in New York, according to Markit Group Ltd.
The index rose from near a 12-week low after a Labor Department report showed more Americans than economists had projected filed applications for unemployment benefits.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed 3,4 basis points to 101,8, Markit prices show.
The Markit CDX index typically rises as investor confidence 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 contract protecting $10 million of debt.
ECB Stimulus
As the euro-area economy gathers strength and the region’s bond markets show signs of stabilizing, the European Central Bank is running down the emergency bond purchases it introduced in May to fight the sovereign debt crisis. Policy makers kept the main euro-region interest rate at a record-low 1 percent today, as forecast by all 51 economists surveyed by Bloomberg News.
«The fear factor has definitely dropped» in Europe, said Malcolm Stewart, the London-based managing partner at North Sea Partners LLC, a closely held investment bank.
Speculation the U.S. recovery is faltering may slow the rally of junk bonds in that country. The Labor Department will report tomorrow that employment fell 63,000 last month, according to the median forecast of 80 economists surveyed by Bloomberg. The economy grew at a slower-than-forecast 2,4 percent annual rate from April through June as consumers reined in spending, the Commerce Department said July 30.
‘Subpar’ Recovery
«Our U. S. outlook has been for a sustained subpar expansion, with a pace of expansion well below a normal recovery from a severe recession,» Bank of New York Mellon Corp. Chief Economist Richard Hoey said in a report yesterday. «We believe that recent evidence of a slower growth rate is real and not a statistical aberration.»
Confidence in Europe’s economic outlook rose to the highest in more than two years in July, the EU said last week, while a report yesterday showed retail sales in the 27-member region increased 0,1 percent in June.
«The data out of Europe have been much better than out of the U.S., and that’s helped buoy sentiment,» said Benjamin Bennett, a credit strategist who helps manage the equivalent of $125 billion of corporate bonds at Legal & General Investment Management in London.
Top Performers
Eighteen of the top 20 European high-yield performers in July were subordinated financial bonds, Bank of America Merrill Lynch indexes show. Dublin-based Eircom’s 350 million euros of floating-rate notes due 2016 returned 30 percent, while Eurohypo’s 600 million euros of perpetual 6,445 percent bonds gained 24 percent.
European junk-bond returns have the potential to more than double to 10 percent this year, according to Simon Thorp, who helps invest the equivalent of about $1,8 billion as a money manager at Liontrust Investment Services Ltd. in London.
The proportion of European high-yield debt that’s trading at distressed levels — or a yield spread of 1,000 basis points or more — fell to 21 percent at the end of July from 32 percent a month earlier, Bank of America Merrill Lynch index data show.
That’s the sharpest decline since the so-called distress ratio dropped 13 percentage points in September 2009. It’s still higher than the U.S. figure, which fell to 13 percent from 15 percent.
«People are still nervous» in Europe, said Alex Moss, head of high yield at Insight Investment Management in London, which oversees the equivalent of $150 billion. «The rally feels flimsy and people are just not focusing on the negative issues right now.»
07/23/2010
— Filed under: Business,Finance
Tags: debt, Greece
