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European returns on corporate bonds set to exceed US counterparts

Despite economic gloom in the region, European corporate bond returns look set to beat their US counterparts

PUBLISHED : Saturday, 01 September, 2012, 12:00am
UPDATED : Saturday, 01 September, 2012, 3:05am

Corporate bond returns in Europe are on pace to exceed the US this year for the first time since 2008, showing investor confidence in the ability of euro-zone leaders to contain the region's fiscal crisis.

Company debt priced in euros rallied 9.04 per cent this year to Thursday, including reinvested interest, compared with 7.68 per cent for US securities, Bank of America Merrill Lynch bond index data shows.

Gains continued last month, led by borrowers in Italy, Spain and France. Milan-based UniCredit's bonds have gained 2.78 per cent last month through Thursday, while those of Madrid-based Banco Santander surged 2.5 per cent.

Investors seeking a haven from government debt turmoil and alternatives to sub-zero yields on some government bonds have driven demand for the relative safety of corporates. Yields on company notes fell to a one-year low after European Central Bank president Mario Draghi vowed on July 26 to do "whatever it takes" to defend the euro, boosting speculation that nations including Spain and Italy will stay in the currency union.

"There is no one silver bullet from the ECB, but the central bank is developing an increasing menu of options to fight the crisis," said Alberto Gallo, head of European macro research at Royal Bank of Scotland.

"We have been positive on European credit all year, particularly on high yield and more recently on banks."

Corporate bonds in Europe last outperformed US debt in 2008, when they lost 3.3 per cent, less than the 6.8 per cent drop in value of American company debt. Last year, Europe gained 1.99 per cent, while the US soared 7.51 per cent.

Investment-grade companies selling securities in Europe pay about 2.6 per cent, or 195 basis points more in yield than benchmark German government debt, down from 311 at the start of the year, the Bank of America Merrill Lynch index shows. Spreads in the US shrank to 184 over Treasuries from 254.

"In the US where yields are so, so low, there really isn't a lot of bang for your buck," said money manager Rajeev Sharma, a money manager at First Investors Management in New York.

Elsewhere in credit markets, Siemens issued US$3.3 billion of debt in pounds and euros as sales of corporate bonds globally surged to the most on record for August.

US commercial paper expanded for the third consecutive week, led by increased issuance from US banks. JP Morgan Chase raised a US$718.9 million collateralised loan obligation for Ares Management, the largest such fund this year. The US two-year interest-rate swap spread, a measure of debt-market stress, extended its third monthly decline, narrowing 0.04 basis point to 17.25 basis points.

The measure, which shrinks when investors favour assets such as corporate bonds and expands when they seek the perceived safety of government securities, has fallen 2.84 basis points this month and is down from this year's high of 48.32 on January 3.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, rose to the highest in two weeks, climbing 2.1 basis points to 103 basis points, according to prices compiled by Bloomberg.

Last month, the index declined 4.5 basis points as of Thursday. In London, the Markit iTraxx Europe index, tied to 125 companies with investment-grade ratings, added 5.8 to 151.9 on Thursday.

Credit swaps typically rise as investor confidence deteriorates and fall as it improves. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals US$1,000 annually on a contract protecting US$10 million of debt.

Bonds of Petroleos de Venezuela, were the most actively traded US dollar-denominated corporate securities by dealers last month, with 2,193 trades of US$1 million or more as of Thursday, according to Trace, the bond-price reporting system of the US Financial Industry Regulatory Authority.

Siemens, Europe's largest engineering company, sold £350 million (HK$4.3 billion) of 13-year debt and £650 million of 30-year securities in Europe's biggest corporate fund-raising since May, according to data compiled by Bloomberg.

The company also issued €400 million (HK$3.89 billion) of two- year notes and €1 billion of bonds due in seven-and-a-half years. Corporate borrowers globally sold US$237.6 billion of bonds last month, exceeding the US$235.3 billion raised in August 2010, data compiled by Bloomberg shows.

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