Riskiest Bonds Among 2021’s Best Performing Assets

(Bloomberg) --

Taking a punt on the riskiest class of junk bonds is paying off handsomely for Europe’s investors this year.

The lowest rank of junk bonds, those rated CCC and below, are handing investors annualized returns of 16.3%, outstripping last year’s 11.7%. It puts them among the best performing asset classes in 2021, according to Bank of America Corp. analysts.

That’s a bonus for the growing number of funds who have moved down the ratings spectrum to boost returns in the face of historically low interest rates and a growing pile of negative-yielding debt. Recent sales from the likes of CCC-rated McLaren Finance PLC were snapped up, even as other markets show signs of weakness, with equity volatility gauge VIX recently jumping the most since May.

“We doubt CCCs can keep up the same momentum as seen earlier in the year -- slowing macro, global QE tapering and the first signs of rising distress in the U.S. high-yield market will act as headwinds,” said Bank of America credit strategist Barnaby Martin. “Yet with such a lack of yield opportunities in euro fixed income today, we still believe CCCs can eke out positive performance from here.”

European high-yield corporate defaults have remained below 2% since March, the result of government support during pandemic restrictions and closures. The sheer volume of expected ratings upgrades is also stoking the appeal of junk-rated companies, with Bank of America expecting 60 billion euros ($70 billion) of high-yield upgrades in 2021. 

More companies are coming to the market, including a deal from oil refiner Raffinerie Heide. Demand is likely to be strong given bonds rated CCC and below have delivered 10.1% excess returns versus government debt year-to-date, according to Bank of America. Euro denominated high-yield credit has only returned 4% so far this year.

Within the CCC sector so far, the bonds of plastic packaging firm Kleopatra Holdings, production company Banijay Group SAS and German retailer Douglas’ subordinated bonds are among those that have generated some of the best returns.

Subordinated bank bonds have also done well. A 500 million-euro 5.5% note of Greek lender Piraeus Financial Holdings SA maturing in 2030 has rallied more than 50% to about 97 cents on the euro, according to prices compiled by Bloomberg. That reflects progress in a multi-year turnaround program, including a 1.4 billion-euro equity raise in April.

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