High-yield bonds are losing their appeal

European investors have remained relatively optimistic about the prospects of high-yield bonds, but their positive outlook is slowly fading as default rate forecasts are due to increase.

A survey by rating agency Fitch Ratings found that high yield corporate bonds remained popular. Monica Insoll, managing director in Fitch’s credit market research group said: “”High-yield corporates remained in top spot as most favoured choice by investors, although by a reduced margin compared to the previous quarter.”

The agency further found that the share of respondents expecting iimprovements in fundamental credit conditions for high yield declined to 40% from 53% in the first quarter of the year.

Compared to the other six asset classes monitored in the survey, optimism about fundamental credit improvement is now stronger for banks as well as for corporates – both investment grade and emerging markets, Fitch found.

Edward Eyerman, managing director of Fitch’s Emea leveraged finance team, said: “Issuance of European high yield has surpassed €20bn thus far in 2011, and with a crowded pipeline it remains on course to surpass 2010’s record of €34bn by the summer.

“However, such rapid growth in demand continues to draw supply from more challenged sectors and includes riskier structures, including more ‘CCC’ rated issuance. Consequently, the outlook for default rates to increase from current lows may shift towards the second half of 2011 and into 2012.”

The Q211 European Senior Fixed Income Investor Survey represented the views of managers of an estimated $4trn (€2.8) of fixed income assets. It was conducted between 31 March and 2 May 2011.

©2011 funds europe

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