Confidence in European economy drives down junk bond yield premiums

Mario Draghi

Mario Draghi

As confidence in Europe’s economic situation has risen, investors have pushed the zone’s junk bond yields to the lowest relative to investment-grade debt since the beginning of the recent financial crisis.

Data from Bank of America Merrill Lynch revealed that speculative grade borrowers from French phone equipment manufacturer Alcatel-Lucent, car manufacturer Renault and Portgual’s Telecom are paying approximately 3.25 percentage points more than the most secure debt issuers. Premiums have fallen from a high point of 20.7 percentage points in March 2009, Bloomberg reports.

As the region recovers from the aftershocks of the recent economic downturn, European Central Bank President Mario Draghi has indicated that he is more willing to use the ECB to boost the financial system.

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” Draghi said, boosting confidence in the European economy, according to Bloomberg.

Central banks around the globe have flooded the financial system, reducing the corporate default rate to nearly an historical low, thereby increasing investors’ willingness to take on riskier assets.

“Everyone’s taking on more risk and while it’s been that way for a while, the dynamic is accelerating,” Allegra Asset Management CIO Norval Loftus said, Bloomberg reports. “People really need to adjust their definition of what high-yield means as we’re definitely in a bubble and, like all bubbles, eventually it’s going to burst.”

Europe’s failure rate fell to 1.8 percent in the last months of 2012, which helped to reduce junk debt yield to 5.3 percent from 12 percent at the beginning of 2012. As a result, companies rushed to sell securities totaling $4.7 billion this year, 10 times more than the same period in 2012, according to Bloomberg.

Bloomberg data revealed that JPMorgan Chase was the leading underwriter in $112.1 billion of global corporate bond sales last week. Spain’s Banco Santander and French Societe Generale took the lead in European sales, each issuing $1.3 billion.

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