Why European junk debt’s US sales are hitting record highs
Sales of European non-investment grade debt to the U.S. have hit a record high this year, despite the continued issues in the euro zone.
U.S. investors have snapped up $106.6 billion of European corporate debt in 2013 so far, 11 percent higher than the same time in 2012.This has been driven by a 67 percent rise in sales of high-yield junk debt, to $28.8 billion for the year so far, according to figures from Dealogic.
There are several key reasons why this is happening.
Companies are taking the chance to refinance their debt when interest rates are low – and likely to remain so for some time if central banks' guidance is anything to go by – and while they are supported by underlying government bond yields.
"This is a lot to do with a lot of companies refinancing debt. Banks aren't lending as much, so they're coming to the bond market," Bryn Jones, head of fixed income research at Rathbones, told CNBC.
"They're using this window of opportunity. When the economy starts doing well, spreads are going to be tight."
Read more: The return of junk bonds
With forward guidance from the Bank of England and the U.S. Federal Reserve suggesting interest rates will remain low for at least another year, even non-investment grade European companies are looking more attractive. Leverage levels have also reduced in many cases since the start of the crisis, making debt easier to service.
"Globally,this shows how sensitive retail investors in credit are to interest rate changes at the moment," Bank of America credit strategists Barnaby Martin and Ioannis Angelakis wrote in a note.
More companies have lost their investment-grade rating as the credit crisis has continued, meaning that there are simply more companies to choose from for investors.
Read more: Who could benefit from the bond sell-off
"Investment grade issuers have been very quiet, particularly in sterling," Jones pointed out.
There are still plenty of risks associated with this kind ofinvestment, and Jones warned that investors still need to do plenty of duediligence.
"There is the danger of a spike in government bond yields.There could also be some risks in 2016/17/18 as companies approach therefinancing window," he added.
"You are always going to get defaults."
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