EUROPE - European investors' enthusiasm for high-yield assets declined in the second quarter of this year, though they remain favourites, according to Fitch's latest European senior fixed income investor survey.
"High-yield corporates remained in top spot as most favoured choice by investors, although by a reduced margin compared to the previous quarter," said Monica Insoll, managing director in Fitch's credit market research group. Views on credit fundamentals were also more subdued than in the previous quarter and commercial lending conditions for the asset class were seen as tightening.
The survey, carried out between the 31 March and 2 May 2011, polled the views of managers of an estimated $4trn of fixed income assets.
There was more concern about credit prospects with the proportion of respondents expecting improvements in credit conditions for high yield declining to 40% from 53% in the previous quarter. Compared to the other six asset classes in the survey, optimism about credit improvement is now stronger for banks as well as corporates - both investment grade and emerging markets.
Concern over banks, which had flared up in the first quarter was more subdued with only 17% of respondents saying they were worried about banks'refinancing problems, compared with 35% in the previous survey.
Investor enthusiasm for emerging markets held up well, with sentiment for this asset class the most consistently bullish over the last four quarters, the survey said.
With European debt issuance running level with last year at €1.8trn, investors were also bullish on issuance volumes. Central government borrowing is down 13% at $653bn although supranational issuance is up by a third at $84bn. Bank and corporate borrowing are higher at $572bn and $164bn respectively.
"Issuance of European high yield has surpassed €20bn thus far in 2011, and with a crowded pipeline it remains on course to surpass 2010's record of €34bn by the summer," said Edward Eyerman, managing director of Fitch's EMEA leveraged finance team. "However, such rapid growth in demand continues to draw supply from more challenged sectors and includes riskier structures, including more ‘CCC' rated issuance." As a result defaults are likely to increase from their current lows in the second half of 2011 and 2012.
Europe's sovereign debt crisis remained a major worry with 64% of respondents, up from 56%, expecting developed market sovereigns to face their greatest refinancing challenge.
While sovereign debt problems remain by far the biggest concern for bond investors, there was a sharp increase in the number of investors worried about the withdrawal of easy money to 61% from 45% in the first quarter of 2011 and 26% in the fourth quarter of 2010.
Consistent with prior quarters, developed market sovereigns were the target of the gloomiest predictions, with 60% of respondents expecting spreads to widen.
Inflation concerns continued to rise, with 68% of respondents seeing inflation risks as high, up from 55% in the previous survey. Some 60%, of respondents believe inflation will affect the pricing of corporate bonds, through an impact on duration, without affecting underlying credit.
US yields are expected to rise significantly in the next six months by 70% of respondents, reflecting concerns about the direction of fiscal and monetary policies; 13% of respondents said this could cause a serious shock to the global capital markets, Fitch said.
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