European Bond Yields – 2013 Update
The cost of borrowing for companies below investment grade or junk status has fallen to historically low levels on account of additional liquidity flooded by the central banks of the developed High Yields economies. This is indicated in the current yields of Bank of America Merrill Lynch High Yield Index at 4.6%. The yield of index has more than halved in the last one year. A similar index measured by Barclays pan-European high yield registered yield of 5.5%, lowest value for the first time. Most recent downward pressure on the European bond yields has been triggered by the monetary action of Japanese central bank. This caused flood of money into the higher yielding assets outside Japan. The yields in Europe are purely supported by the easing stance of European Central Bank (ECB) and its commitment to execute outright monetary transaction involving purchase of bonds of troubled governments, provided they apply for a bailout. Though no government have come forward for an actual aid, but the ECB backstop itself has done the job so far. The current yields on troubled South European economies’ bonds, Spain and Italy, are trading below 4%. This is below the levels seen in Jul 2012, when the yields widened beyond 7%, a level considered unsustainable in Europe. On the other hand, fundamentals have not given any indications of improvement, as economies across Eurozone continue to show weakness. The unemployment rate has been increasing for the Eurozone and for Greece it is comparable to that of US depression era in 1930s. Be it for any reasons, the eased environment has allowed even the weakest credit to access the bond market and benefit from low interest rates. This has extended the debt maturity profile for corporate entities in Europe.
Driven by above factors, the first quarter of 2013 saw record issuance from non investment grade issuers. The first quarter registered issuances of high yield bonds worth around USD 38 billion. Some of the biggest issues in the junk bond space came from the sale of Virgin Media to Liberty Global for a consideration of USD 21.9 billion. Netherland’s telecom operator KPN N.V. and automotive part supplier Schaeffler also tapped the market opportunistically to issue bonds worth more than Euro 1 billion. The situation is other way round in the periphery with companies facing trouble in accessing bond markets at favou