The risk premiums on the bond market are always a reflection of whether times are calm or turbulent. In times of crisis, for example, spreads on euro-denominated corporate bonds rise sharply compared to government bonds because confidence on the market falls and therefore issuers of corporate bonds have to offer a higher coupon. "It is currently noticeable that the risk premiums of euro corporate bonds are above the long-term average," says Mathias Beil, Head of Private Banking at Hamburg-based Sutor Bank, analyzing the current situation on the bond market. "Apparently, the market is currently pricing in a recessionary environment, which would justify the above-average spreads," explains Beil. In his view, investors could benefit above all in the euro high-yield bond segment. However, it is important to take a close look - the real estate sector should be avoided.
Euro high-yield bond segment offers opportunities - with the exception of the real estate sector
The yield advantage of euro corporate bonds compared to German government bonds is currently between 120 and 160 basis points, depending on the maturity. According to Mathias Beil, the fact that the risk premiums of euro corporate bonds are currently above the long-term average is significant because this average includes events such as the Covid crisis in the first quarter of 2020, the debt crisis in the eurozone with the well-known widening of spreads in the peripheral countries and the financial crisis dominated by the Lehman bankruptcy. This therefore clearly suggests that a recessionary environment is being priced in.
According to Mathias Beil, it is interesting to look at the market for euro high-yield bonds. In 2007, 35 percent of bonds were rated BB, today the figure is 61 percent. Back then 54 percent were rated B, today it is 34 percent and finally in 2007 11 percent were rated CCC, today it is only 4 percent. "Is the conclusion that the market has improved correct? The answer is no," explains Beil. Overall, the high-yield market in Europe has grown and numerous rating downgrades have led to companies being downgraded from investment grade to BB.
Nevertheless, there are warning signals on the market for euro corporate bonds primarily only in one segment - real estate. "Well-known asset managers have examined the market using stress scenarios and determined that around five percent of the market is currently represented by issuers from real estate companies. However, 57 percent of these are at risk of default. That is a real warning signal," says market expert Beil. It is not just the Signa Group that is the problem, but also the companies' involvement in the US real estate market, which is currently groaning. The retail sector, where the probability of default is just under 17%, is a distant second among the sectors with a higher default risk. "Apart from the real estate segment, the euro high-yield market is rather well positioned overall," explains Beil.
With a volume of around 350 billion euros, the segment also offers sufficient choice for different investor risk profiles. "Risk diversification is and remains important. However, euro-denominated corporate bonds can in fact be used to add an additional yield component to the bond segment, as ten-year German government bonds now only offer yields of just over two percent," says Mathias Beil.
