REFILE-Junk bonds enjoy stellar November, riskiest debt outperforms

Yoruk Bahceli
·3 min read

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* European high-yield market set for best return since April

* Lowest-rated Triple C bonds outperform

* Vaccine news lowers corporate default expectations

By Yoruk Bahceli

AMSTERDAM, Nov 30 (Reuters) - Junk bond markets on both sides of the Atlantic have notched a stellar November, with the riskiest securities outperforming on hopes that coronavirus vaccine rollouts will boost economic recovery and ward off corporate defaults.

Support also came from hopes Joe Biden's victory in the U.S. presidential election could bring a stimulus package, while a divided government in Washington made corporate regulation less likely.

In Europe, the ICE BofA euro high yield index is set to return 4.3%, its best month since April, while the U.S. index, whose yield fell to a record low earlier in November, has chalked up its best return since July.

Putting aside April, when markets staged a bounce-back after the March sell-off, it is the best month since 2012 in Europe.

"We've cleared quite a few hurdles recently. Elections are behind us, the first vaccines are coming out, so positive developments on both fronts propelled the markets higher and removed quite a bit of the risk premium that was there," said Andrey Kuznetsov, fund manager at Federated Hermes.

Clear outperformers were bonds rated Triple C and lower - at the highest risk of default - returning over 7% in both Europe and the United States. For the latter, it was the best month since 2016.

JPMorgan expects European junk default rates to be just 2% next year.

"What's gone off the table is the sense that more challenged businesses are going to face some kind of short-term liquidity crunch, and that's a huge source of relief for investors," said Ben Thompson, JPMorgan's head of EMEA leveraged finance capital markets.

Vaccine hopes helped companies hard-hit by the pandemic including Germany's Lufthansa, Britain's Pure Gym and cruise operator Carnival tap bond markets.

Carnival managed to sell a six-year U.S. dollar unsecured bond for a yield of 7.625%, versus nearly 12% on a three-year secured bond it sold in April.

"There's enough yield in these recent deals that if the world is anywhere near normal next year, investors could feel pretty smart for having bought them," Thompson said.

RISKS AHEAD

Sustaining the rally will require incrementally more positive news, like significant improvements in corporate earnings next year, according to Kuznetsov.

Wild cards, meanwhile, could be "a change in corporate behaviour as corporates take advantage of lowest yields of all times, or some developments around COVID, or missteps by the central banks and governments adjusting the level of ongoing support," he said.

Once vaccines become available, ratings agency S&P expects a scaling back of government support schemes to result in increasing European 12-month default rates to 8% by next September, from below 5% at present.

(Reporting by Yoruk Bahceli in Amsterdam Editing by Matthew Lewis)