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European investor outlook worsens for high-yield bonds

euro notes 50s 200

High-yield bonds remain the most popular investment choice among European fixed-income managers, although more investors are developing a negative outlook for the asset class.

Fitch Ratings’ credit market investor survey shows that 21 per cent of fund managers voted high-yield as their top investment choice for the third quarter of the year.

Although this is down from the 24 per cent citing the class in the second quarter, it is still significantly above the 14 per cent opting for it in the first quarter.

However, investors’ outlook for high-yield credit conditions has worsened in recent months. Some 51 per cent say they expect conditions to deteriorate – up from 37 per cent in the previous quarter’s survey.

Total return performance for European high-yield reached 15.3 per cent for the year to 10 August, surpassing emerging-market corporate and sovereign debt’s 13.2 per cent and outpacing US high-yield’s 9.3 per cent.

“We believe European HY will continue to receive support despite difficult markets, as investors who may be intolerant of low or negatively yielding European sovereign debt seek to bolster returns,“ Fitch says.

“The asset class outperforms even emerging-market bonds year to date, a pattern which has not happened since 2009.”

The agency adds that the default rate on European high-yield is expected to rise in the coming months on the back of renewed concerns on the region’s growth. The default rate for the 12 months to the end of the second quarter was a “low” 1.3 per cent.

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