Corporates wanting to issue euro high yield bonds would be met with strong demand in the next few months, market participants told GlobalCapital.
Two investors said average yields of euro corporate high yield bonds, which already sit at all-time lows of about 2.5%, could tighten further in the first half of 2018.
“As 2018 starts, we favour increasing holdings of high yield bonds from issuers of the euro area,” said one fund manager. He added that US high yield looked “crowded and expensive” in comparison to the European market.
Borrowers should even bring some “aggressive deals” early this year, said a head of high yield at an investment bank, instead of waiting until the last months, as it happened in 2017.
“The European high yield market is sufficiently predictable for issuers to be able to plan ahead,” he said. “That’s also the case for issuers with ratings below double-B and hairy stories. The next six months could be a better window for them than later in the year.”
This optimism contrasts with the more cautious behaviour of retail investors, however. Last week, bond buyers took more than €400m out of European retail high yield funds, ending the year with a €7.2bn outflow over the 12 month period, data from Bank of America Merrill Lynch (BAML) showed.
Among European retail funds active in fixed income markets, only funds investing in high yield and government bonds posted negative net flows in 2017 — government bond funds had outflows of €1.5bn. Funds investing in loans, equities and commodities all received net positive inflows.
Marching on, anytime now
“Investors will be going through the data this week,” said one fund manager, “but it seems retail figures point at bigger outflows for 2017 than in recent years. What does it mean? We had a pretty strong primary market during most of last year, so these numbers might not be a warning of anything specific.”
“Demand in the European high yield market is more diverse, and more fragmented, so it’s hard to measure the impact of retail outflows,” said the banker.
Some of the most familiar bookrunners of European high yield bond deals have published reassuring outlooks for 2018.
After an annual record issuance volume of about €75bn in 2017 in the European high yield market, according to Société Générale data, 2018’s figures may be just “slightly down”, said the bank.
BAML also expects high yield issuance to remain buoyant, describing the European high yield as a “tremendous liquid financing market”.
Levfin optimism
In fact, many buyers of European leveraged finance debt said they were are raring to invest, despite the moderate signs of exhaustion they showed at the end of last year.
“There’s a sort of globally synchronised growth that feels good enough to support the risk-on rally into 2018,” said one multi-asset portfolio manager. “Also, central banks appear committed to expand their quantitative easing programmes until 2019, so that is a big positive.”
Investors in high yield bonds are making optimistic noises, particularly for the first half of the year, about the strength of their demand for paper.
“High yield remains a very good source of income,” said one. “When you look around in other fixed income markets, you see that it’s not hard to get good levels of returns and you don’t have to revert to long durations or riskier assets.”
Investors speaking to GlobalCapital said the outflows suffered by European retail high yield funds during 2017 should be taken as a non-fundamental piece of data.
Retail high yield investors withdrew some €210m from Europe-focused funds in the week ending on December 22, almost double the outflows of US funds or global funds.
The European leveraged loan market also reflected a flick of investor anxiety as 2017 was ending. Average bid prices in Europe fell by 10bp to 2% during the last three months against a fall of just 4bp in the US, IHS Markit said in a report on Tuesday.
The public deal pipeline was empty on Wednesday, although bankers also predict a busier start of 2018 than it was last year.