Bloomberg News

High-Yield Bonds to Rally as Europe Nears EU Revamp, Artio Says

December 06, 2011

Dec. 6 (Bloomberg) -- High-yield bonds will probably rally as European Union leaders meeting this week agree to stronger fiscal coordination to ease market concern that the euro-area is struggling to halt its debt crisis, Artio Global Investors said.

Global high-yield notes have gained this month as German Chancellor Angela Merkel and French President Nicolas Sarkozy said yesterday they want the summit to agree on rewriting the EU’s governing treaties to tighten regional economic cooperation. The sector can return between 5 percent and 8 percent based on Artio’s expectations for default and recovery rates, Patrick Maldari, a New York-based senior portfolio manager said yesterday at a briefing in Sydney.

“By the end of this week, Europe will come to some agreement that will at least buy them some time and satisfy the global markets that they’re attempting to get ahead of the problem,” he said. “In the current environment we think that the high-yield market will probably do quite well if risk assets perform and start to recover as we get some positive news out of Europe.”

A global high-yield index has risen 1.3 percent since Nov. 30, including reinvested interest, Bank of America Merrill Lynch data show. It fell 2.7 percent last month and has declined in three of the past four months. U.S. speculative-grade bonds have gained 1.2 percent in December after losing 2.2 percent the previous month, according to a separate index.

High-yield notes, also known as speculative-grade or junk debt, are bonds that carry a credit score equivalent to a Standard & Poor’s level of BB+ or lower.

Artio had $36.2 billion in assets under management as of Oct. 31 and oversees $4.2 billion in high-yield investments, according to the company.

Equity Alternative

Investors retreated to the safest sovereign securities this year as the European crisis that began in Greece threatens to spread to the region’s largest economies. S&Ps yesterday put 15 euro-zone nations on watch for a credit downgrade. Germany, France, Netherlands, Austria, Finland and Luxembourg, the euro area’s six AAA rated countries, are being placed on “CreditWatch negative,” pending the result of the EU summit, S&P said.

Outperform Large-Caps

Speculative-grade debt may perform better than large-cap equities in a slow growth environment with the U.S. economy set to expand at a below-trend zero to 2 percent rate, Maldari said. Merrill Lynch’s Global High Yield Index shows a 2.9 percent decline since June 30, while the S&P 500 Index handed investors a 3.9 percent loss including reinvested dividends.

“In a slow-growth environment companies have a tremendous amount of flexibility in their capital structure to lay off workers or to forego capital expenditures enough so that they can manage their balance sheet and pay their creditors,” Maldari said. “We have been recommending the high-yield asset class as a strategic alternative to large-cap equity.”

Artio favors B rated securities, loans and emerging market corporate debt, Maldari said. The firm has 66 percent of its high-yield portfolio invested in the U.S. with about 50 percent of assets in B rated notes and 19 percent in bank loans, he said.

--Editors: Jonathan Annells, Garfield Reynolds

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net;

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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