BLBG: Europe Company Debt Spreads Above U.S. as Growth Diverges: Credit Markets
Relative yields on European investment-grade company bonds are the highest ever compared with U.S. debt as the region’s deficit crisis worsens and the U.S. economy revives.
Investors demand an extra 189 basis points in yield to own high-grade euro-denominated bonds instead of government debt, compared with a spread of 169 for U.S. corporate notes, Bank of America Merrill Lynch index data show. The 20 basis-point difference matches the record reached on Dec. 15.
While European government budget cuts damp the region’s outlook for growth, retail sales, consumer confidence and industrial production in the U.S. are rising. Bonds of Italian utility Enel SpA are the worst performers this month among the 50 biggest issuers in Bank of America’s EMU Corporate Index.
“The big change is that there’s a lot of fiscal tightening in Europe,” said Mark Kiesel, global head of corporate bond portfolio management at Pacific Investment Management Co. in Newport Beach, California, manager of the world’s biggest bond fund. Europe will suffer “lower animal spirits, lower spending, lower hiring,” he said.
The spread on investment-grade bonds in euros widened 2 basis points this month, while relative yields in the U.S. declined 13, Bank of America Merrill Lynch indexes show.
Until last month, spreads in Europe were higher than those on U.S. debt just once, at the end of May. The euro index spread is historically lower because the average maturity of bonds it measures is 4.9 years, half that of the U.S. gauge.
Global Spreads
Elsewhere in credit markets, spreads on company debt from the U.S. to Europe and Asia narrowed 1 basis point to 170 basis points, or 1.7 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields were little changed at 3.96 percent.
The securities have returned 6.77 percent this year on average, including reinvested interest, compared with 3.31 percent for government bonds. Equities as measured by the MSCI World Index have gained 10.4 percent, including dividends.
Corporate bond sales worldwide slowed to $41.5 billion from $60.1 billion the prior week, according to data compiled by Bloomberg. Occidental Petroleum Corp. sold $2.6 billion of notes in the largest offering in more than five weeks. Bank of America Corp. issued $1.5 billion of fixed-rate debt in its first such sale since August.
Sales this year totaled $3.14 trillion, compared with $3.88 trillion in all of 2009 when companies rushed to raise capital as credit markets began to open, Bloomberg data show.
French Bond Risk
The cost of insuring against a default on French government debt surged to a record today on speculation Europe’s sovereign deficit crisis would hurt nations beyond the so-called peripheral countries. Credit-default swaps tied to France’s bonds rose 3 basis points to a record 105.5, according to CMA.
Last week, U.S. corporate debt insurance costs fell for a third week. Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 0.82 basis point to 86.44, the lowest weekly close since Nov. 5, according to Markit Group Ltd.
Credit-default swaps typically fall as investor confidence improves and rise as it deteriorates. Contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10 million of debt.
Leveraged Loans
The Standard & Poor’s/LSTA US Leveraged Loan 100 Index rose 0.43 cent for the week to 92.48 cents on the dollar, the highest weekly close since April 30. The index tracks the 100 largest dollar-denominated first-lien leveraged loans.
In emerging markets, relative yields increased by the most since the week ended May 21. Spreads jumped 26 basis points to 254 basis points, after declining the prior two weeks, according to JPMorgan Chase & Co. index data.
European spreads widened 21 basis points this year, while relative yields on dollar debt declined the same amount, Bank of America indexes show.
The euro region’s economy will likely expand 1.7 percent next year, the same as in 2010, according to economists at New York-based JPMorgan. The bank’s economists forecast growth in the U.S. will accelerate to 3.3 percent from 2.9 percent.
“I don’t think in Europe it’s even about the economy; it’s how do I take the next step forward and not botch the bailout,” said Brian Cogliandro, managing director and head of U.S. syndicate at Mitsubishi UFJ Securities USA in New York. The U.S. economy “appears to have some underlying strength, it appears to be on a sustainable path,” he said.
European Bailouts
Germany, the biggest contributor to Europe’s bailouts of Greece and Ireland and the continent’s largest economy, pushed through an accord to set up a permanent debt-crisis mechanism at euro-region finance ministers’ talks last week. The program allows for the purchase of government bonds and advancing short- term credit, though leaders remain divided on whether to increase the 750 billion-euro ($986 billion) emergency fund or to rush aid to Portugal or Spain.
“This is weaker growth due to all the austerity measures, which are especially hitting the peripheral countries,” said Sven Kreitmair, a credit analyst at UniCredit SpA in Munich. “The economic growth, recovery scenario is stronger in the U.S.”
Sovereign rating downgrades are adding to European bondholders’ pain. Moody’s Investors Service cut Ireland’s credit rating five levels to Baa1 on Dec. 17, and said last week it may downgrade Spain and Greece, which already has a junk grade.
State Spending
Rome-based Enel’s bonds lost 2.1 percent this month, according to Bank of America’s EMU Corporate Index. Debt sold by Paris-based water company Veolia Environnement SA and Berlin- based rail operator Deutsche Bahn AG each lost 2 percent.
Bonds of Rome-based defense contractor Finmeccanica SpA lost 1.9 percent, almost double the average 1 percent decline for euro-denominated investment-grade securities, Bank of America index data show. S&P cut the company’s short-term rating and downgraded the outlook on its long-term BBB grade on Dec. 6, saying it’s “constrained” by a reliance on Italian state spending.
Euro-region bonds are being hurt “as the sovereign crisis impacts the real economy,” said Andrew Moulder, a credit analyst at CreditSights Inc. in London. “With the utilities, for example, as austerity measures slow an economy, that has a knock-on effect.”
To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net; John Glover in London at johnglover@bloomberg.net
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net
