Europe’s Credit Market Comes Full Circle From Pandemic Despair

European credit markets have just completed a round-trip recovery from peak pandemic fear.

Borrowing costs are retreading pre-crisis levels, with confidence in an economic recovery sparking double-digit gains in the riskiest debt.

Healthier balance sheets are turning 2021 into the year of the rising star as more companies re-establish investment-grade credentials -- the reversal of 2020’s swell of fallen-angel downgrades. The primary markets are running at full pelt with none of the black-out days that interrupted issuance in 2020.

If investors have put aside fears over default risk, they’re homing in on the threat of rising inflation that comes with rebounding growth. Quality issuers that tend to sell longer-dated bonds are out, junk bonds with shorter debt are in.

Here are six charts showing how reflating economies are reshaping the credit landscape:

Europe’s Credit Market Comes Full Circle From Pandemic Despair

The hardest-hit by the pandemic are staging the most spirited rally. Companies with CCC ratings are generating double-digit returns, leaving their better-rated counterparts far behind. A combination of yield-hunting, policy support for troubled companies and improving prospects amid the vaccine rollout has been luring investors back after the initial shock.

Europe’s Credit Market Comes Full Circle From Pandemic Despair

Yields of the riskiest junk bonds and lower-ranked bank debt known as CoCos are retreading pre-pandemic lows. European CoCo yields have eased back to about 3.6% after peaking at nearly 15% thanks in part to a relief package for banks, including a dividend ban to shore up capital buffers.

Europe’s Credit Market Comes Full Circle From Pandemic Despair

2021 is shaping up to be the year of the rising star as companies regain investment-grade ratings and admission to bigger indexes. It’s the reversal of 2020’s flood of fallen-angel downgrades into junk. In January 6.5 billion euros ($7.9 billion) of debt had exited junk, and Bloomberg Intelligence analysts are predicting more to come.

Europe’s Credit Market Comes Full Circle From Pandemic Despair

There hasn’t been a single blank day for bond sales in Europe this year, a stark contrast to the nine over the first quarter of 2020 as issuers sat out the volatility. New issuance subsequently exploded as companies dashed to build up cash reserves, leading to a record-smashing year for sales.

Europe’s Credit Market Comes Full Circle From Pandemic Despair

Sales of green, social and other sustainable-themed bonds jumped last year, countering fears that the pandemic would divert attention away from responsible financing. Brisk issuance has continued into 2021, with year-to-date sales already surpassing 40% of 2019’s full-year tally.

Europe’s Credit Market Comes Full Circle From Pandemic Despair

The inflation tantrum roiling government bonds has rekindled duration risk in corporate bonds too, prompting a rotation out of funds investing in long-dated debt. The total return for an index of euro investment-grade bonds is negative 0.9% this year, the worst start to a year in data going back to 1999.

©2021 Bloomberg L.P.

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