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Thursday, July 21, 2011

Crisis Erases 75% Junk Bond Gains as Losses Spread: Euro Credit



Junk corporate bonds are turning into a losing bet in Europe as surging sovereign yields infect assets that just 18 months ago were handing investors returns of more than 75 percent.

Speculative-grade bonds have lost 1.1 percent on average this month, adding to the 1.6 percent investors forfeited in June, according to Bank of America Merrill Lynch data. They’re being beaten by German bunds, commodities and investment-grade company notes, while stocks are still proving a bigger casualty of the euro-region crisis.

“There’s so much uncertainty about the future of the euro project,” said Marchel Alexandrovich, a London-based economist at Jefferies International Ltd., a unit of the U.S. investment bank. “No one knows what tomorrow will bring.”

Investors are shunning all but the safest securities as European Union leaders prepare to meet tomorrow to address the sovereign crisis that has propelled Italian and Spanish bond yields to euro-era records. German Chancellor Angela Merkel said yesterday the situation can’t be fixed “in one step.” Confidence in high-yield notes is also withering as government budget cuts hamper economic growth in the region, hurting companies’ ability to pay debt.

Junk bonds returned a record 76.4 percent, including reinvested interest in 2009, and 14.7 percent last year, according to Bank of America Merrill Lynch’s Euro High-Yield Constrained index of 297 bonds issued by companies such as Fiat SpA (F) and Continental AG. The debt gained 4.1 percent in the first quarter of this year and just 0.7 percent in the second.
Relative Performance

Junk bonds, rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s, lost money this month as benchmark German government debt returned 2.7 percent, and investment-grade corporate securities earned 0.8 percent, Bank of America index data shows. Investors made more by holding commodities, with the Standard & Poor’s GSCI Spot Index increasing 2.8 percent in July. Stocks were a worse bet, with the Stoxx Europe 600 index losing 3.9 percent.

“Given that high yield is a riskier asset class, the debt crisis and associated economic concerns have a greater impact than on investment-grade bonds,” said Vasant Mehta, a credit strategist at Royal Bank of Scotland Group Plc in London.
Speculative-grade companies’ borrowing costs have surged this month. The extra yield investors demand to hold junk bonds rather than government debt widened 71 basis points, or 0.71 percentage point, to a seven-month high of 641 on July 18.

Bloomberg

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