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* European high yield market set for best yield since April
* Lowest rated Triple C bonds outperform
* Vaccine news lowers business expectations by default
AMSTERDAM, November 30 (Reuters) – Unwanted bond markets on both sides of the Atlantic recorded a bumper November, with riskier stocks surpassing hopes that the coronavirus vaccine rollout will boost economic recovery and avert corporate failures.
Support also came from the hope that Joe Biden’s victory in the U.S. presidential election could bring a stimulus package, while a divided government in Washington has made business regulation less likely.
In Europe, the ICE BofA euro high yield index is expected to return 4.3%, its best month since April, while the US index, whose return fell to an all-time high in early November, recorded its best performance since July.
Apart from April, when markets rebounded from the March sell-off, it was the best month since 2012 in Europe.
“We have overcome a lot of obstacles recently. The elections are behind us, the first vaccines are out, so positive developments on both fronts have propelled the markets up and removed a good chunk of the risk premium that was there, ”said Andrey Kuznetsov, fund manager at Federated Hermes.
Bonds rated Triple C and lower – at the highest risk of default – significantly outperformed bonds by over 7% in Europe and the United States. For the latter, it was the best month since 2016.
JPMorgan expects European default rates to be just 2% next year.
“What’s gone is the feeling that the most struggling companies are going to face some sort of short-term liquidity crunch, and that’s a huge source of relief for investors,” said Ben Thompson. , Head of Leverage Financial Markets for JPMorgan for the EMEA region.
Vaccine hopes have helped companies hit hard by the pandemic, including Germany’s Lufthansa, Britain’s Pure Gym and cruise line Carnival, in bond markets.
Carnival managed to sell a six-year unsecured US dollar bond for a yield of 7.625%, compared to nearly 12% on a three-year guaranteed bond sold in April.
“There is enough return in these recent deals that if the world gets closer to normal next year, investors might feel smart enough to have bought them,” Thompson said.
RISKS IN THE FUTURE
Continuing the rally, Kuznetsov said, will require progressively more positive news, such as significant improvements in corporate earnings next year.
Wildcards, meanwhile, could be “a change in corporate behavior as companies profit from the lowest returns ever, or some developments around COVID, or missteps by central banks and governments adjusting. the level of continued support, ”he said.
Once the vaccines become available, the S&P rating agency expects a reduction in government support schemes to result in an increase in 12-month European default rates to 8% by next September, against less than 5% currently.
Reporting by Yoruk Bahceli in Amsterdam Editing by Matthew Lewis