Opportunity Knocks for European Corporate Bonds
Is it safe to go back in the bond-market water? Global debt markets have been in a funk since U.S. Federal Reserve Chairman Ben Bernanke first hinted that the central bank's bond-purchase program could be wound down. But the rise in yields has created opportunities. In particular, European corporate debt looks interesting given the very different economic outlook and a dovish central bank.</br></br>Corporate bonds were hit hard in the turmoil and haven't really bounced back. While the Standard & Poor's 500 and Dow Jones Industrial Average have vaulted to new record highs, corporate bonds have only retraced part of the selloff. U.S. high-yield bonds, for instance, now yield 6.2% according to Barclays indexes, versus 5.2% on May 22, when Mr. Bernanke first roiled markets with his comments. Euro-denominated investment-grade bonds yield 1.5 percentage points more than German bunds, up from 1.2 points; European high-yield bonds yield 6.5%, up from 5.7%.</br></br>U.S. bonds look vulnerable to a further selloff, particularly if the U.S. economy continues to recover. Corporate bonds have been an unhappy half-way house this year in the U.S.: Investment-grade bonds have lost money, down 2.8%, while the 2.9% gain chalked up by high-yield bonds is paltry compared with the 18% rise for the S&P 500.</br></br>Europe is a different matter, however. The European Central Bank sounds increasingly dovish, saying this month that rates are set to remain at present or lower levels for an extended period. That has led U.S. and European government bonds to diverge: 10-year German bunds now yield 1.55%, nearly a full percentage point less than their U.S. peers. Euro-denominated investment-grade corporate bonds have held their head above water, up 0.9%, while high-yield debt is up 3.3%.</br></br>True, bonds are underperforming stocks: The Europe Stoxx 600 index is up 5.8% this year. But the economic outlook in Europe is far murkier than in the U.S., making stocks a riskier bet and boosting the allure of bonds. European companies are still in cautious, cash-hoarding mode--a boon for bond investors--in contrast to U.S. peers that have become far more shareholder-friendly.