European returns on corporate bonds set to exceed US counterparts

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."