Investors Thirsty for Yield Dive into European Junk Bonds

Thursday, 14 Feb 2013 10:37 AM

By Dan Weil

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The limited income opportunities available for investors in developed markets has them lapping up European junk bonds like there’s no tomorrow.

In January, junk-rated European companies issued almost $16 billion in bonds, a record high for January, The Wall Street Journal reports.

Spain, Greece, Portugal, Italy and Ireland, the eurozone’s most beleaguered economies, accounted for almost $8 billion of the total.

Video:
Economist Predicts 'Unthinkable' for 2013

"It's been a radical change in January," Anil Jhangiani, director of ratings for industrial companies at Fitch Ratings, tells The Journal. "There is this hunt for yield. It started with the biggest issues, then it went down the rating spectrum."

Companies want to get in while the going is good, hoping to raise money before Europe’s financial crisis can return.

However, “Some of the newly issued junk bonds have fallen in trading on the secondary market, as investors become concerned about the outcome of this month's elections in Italy and a corruption scandal in Spain,” The Journal states. “An increase in European corporate-default rates or a worsening of the U.S. fiscal situation also could dent the market.”

It’s the ebbing of that crisis that helped draw investors to the market.

"Investors feel more comfortable looking at credit risk in the peripheral areas [Southern Europe] given the stabilization of the banking systems there," Andrew Jessop, high-yield portfolio manager for Pimco, tells The Journal.

U.S. investors are coming back to Southern Europe's capital markets, after fleeing last year.

But bankers tell The Journal that investors are more interested in companies with limited exposure to the region.

Enthusiasm is high now for government bonds in Southern Europe too. These bonds are safer than junk, of course.

“There’s still a big grab for yield going on, which does encourage people” to buy Italian and Spanish government bonds, Marc Ostwald, a rates strategist at Monument Securities in London, tells Bloomberg.

“The spread relative to bunds [German government bonds] is still tightening despite the supply.”

On Wednesday the spread of 10-year Spanish government bonds over equivalent bunds fell to 351 basis points, the lowest in nine days. Spain’s 10-year yield stood at 5.20 percent.

Video: Economist Predicts 'Unthinkable' for 2013

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