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European corporate bond: An unfinished credit revolution

When bankers involved in European credit issuance enthuse about the astonishing growth in the market they are only in part talking their own book. The euro revolution means demand is certainly there. Supply of the right mix of paper in the right amounts and with sufficient liquidity is another question. And beyond that there are growing suspicions that most buyers are not taking enough account of risk.

Who would have thought that a market regarded by most investors two years ago as a curiosity would undergo such a transformation? After years of twiddling their thumbs on the sidelines as equity capital markets hogged the limelight, suddenly debt bankers are getting a piece of the action. In fact, most of the action is coming their way these days. "I doubt we'll see this kind of shift in dimension in our careers again," says Chris Van Niekerk, head of European corporate debt capital markets origination at Barclays Capital.

But a happy ending for what is ostensibly a success story is by no means guaranteed. Although investors are certainly hungry for the new asset class, their enthusiasm is tempered by frustration at the lack of sector diversity and a stagnant secondary market. What's more, credit still hasn't shaken off its lingering legacy of underperformance.

Since credit took off in Europe in 1998, the market has expanded at a phenomenal rate and is still growing fast, despite the slowdown elsewhere. The birth of the euro brought about a switch from multi-currency funds focused on one asset class to single-currency funds with a taste for multiple asset classes.

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