Fortune Should Favor the Brave in European Bonds: Mark Gilbert

As the global stockpile of debt with negative yields has climbed to a record $17.4 trillion, it’s gotten very tempting to buy less creditworthy bonds to earn more income. With central banks still opening the monetary spigots and governments offering fiscal support to their economies, the risk/reward ratio in European debt looks likely to repay the more adventurous portfolio managers.

Yields are pretty low across the rating spectrum in European bonds. The average yield on debt with AA ratings, one level below the top tier, is negative. One rung lower, yields are barely positive. Investors have to stretch down to below investment grade to the BB category to earn more than 2%.

Not Much Bang for Your Buck

When yields spiked in March as it became clear the coronavirus would wreak havoc on the global economy, it turned out it was a great opportunity to load up on low-rated debt, which suffered a bigger hit than more creditworthy securities. The yield premium available from buying BB rated European debt rather than less-risky AA bonds soared to more than 600 basis points. That’s the highest spread since the global financial crisis more than a decade ago.

And fortune has favored the brave, with spreads on junk debt tightening ever since.