Europe's corporate bond market risks becoming a victim of its own success in the year ahead as reduced issuance by cash-rich treasurers offers slim pickings for investors accustomed to the double-digit returns this year.
Credit Agricole is predicting a 37 per cent slump in corporate bond issuance, Morgan Stanley forecasts a 15 per cent drop, and Societe Generale expects a 6 per cent decline after the busiest year since the start of Europe's credit crisis.
Investors will earn a third of the 12.5 per cent they received for holding investment-grade debt this year, analysts at Societe Generale and Royal Bank of Scotland estimate.
Sales of corporate securities soared to US$383 billion this year as companies took advantage of record-low yields to sell bonds to investors seeking a haven from the euro zone's fiscal turmoil.
Issuance is set to slow as company treasurers wary of a worsening debt crisis accumulated €579 billion (HK$5.95 trillion) of cash, the most in at least a decade, according to data.
"It's not the normal correlation, and we can't expect it to repeat itself," said Orjan Pettersson, a Stockholm-based fund manager at SEB Asset Management.
"Returns will be lower next year."
Corporate bond yields plunged to a record-low 1.96 per cent on average from 4.4 per cent at the start of the year.
The yield premium to benchmark German government debt has shrunk to 146 basis points, or 1.46 percentage points, the smallest spread since April 2010, Bank of America Merrill Lynch data shows.