Yields on the best rated junk bonds in Europe are at their lowest in seven years as investors move cash away from peripheral assets to seek better returns than available in sovereign debt.
Double-B corporates can this week borrow at an average of 4.75 per cent, according to the JPMorgan Euro High Yield index, down from 7 per cent at the start of the year and the lowest rate since 2005.
Even yields on triple-C rated bonds have fallen from 20 per cent at the start of the year to 13.7 per cent amid a market rally that has seen European equities shoot up. Bond prices move inversely to yields.
“There is a huge search for yield at the moment with investors trying to put their cash to work,” said Eric Capp, head of high yield capital markets at RBS. “Most is going into investment grade debt, but a lot is moving into the high-yield space as well.”
The strongest high-yield demand has come for companies in the core of Europe and in non-cyclical sectors. Belgian telecom provider Telenet was last week able to sell €700m of 10 and 12-year bonds with low yields of 6.25 per cent and 6.75 per cent.
The Markit iTraxx Europe Crossover index, which tracks credit default swap spreads of 50 mostly junk-rated European companies, has fallen from 787bp at the start of the year to 582bp.
Many of the largest European companies are borrowing at record low rates.
This month Procter & Gamble issued €1bn of 10-year bonds priced at 25 basis points above mid-swaps, the European reference point for funding bond issues, in its first euro issuance since October 2007, when it issued a similar sum at 50bp over mid-swaps.
Markit Europe iTraxx index, which tracks the cost of insuring against default on Europe’s 125 most-liquid investment grade names, has fallen from 185bp in May to 144bp this week.