European high-yield market: The high-yield trap
Orderbooks for European high-yield deals are unprecedented. Has the market outgrown its traditional allocation procedures?
Although everyone in the market grumbles about the chase for yield, most of them seem to be joining in. “People are desperate to buy credit,” says one banker. “€20 million to €40 million MTNs for Italian companies that no one has ever heard of are going through.”
There is a strong sense that the market is becoming irrational, but buyers are caught up in the need to find yield and put money to work. “There is only high risk now, not high yield,” says a DCM head. “Investors feel they are being coerced into buying some of these products. Cash is returning nothing and redemptions are high. Secondary markets are not functioning, so they have to get involved in primary. Credit is simply too tight for the cycle.” The problem is that every investor faces the same challenge. “With the US dollar credit index spread at 100bp, to beat the index many funds are holding an overweight and hoping the index grinds tighter. However, when spreads are this tight you’d have to be 30% to 40% overweight in terms of beta risk to make your target. This means you have to be buying peripheral government bonds, high yield and structured credit,” says Ben Bennett, credit strategist at Legal & General.