Bankers are declaring the growing corporate high-yield bond market as one of the most exciting new credit areas. This is because investors' new willingness to take credit risk translates directly into an opportunity to do what investment banks love best: leading new issues.
The arguments for investors to buy corporate high-yield bonds are that they provide diversification from investmentgrade bonds and equity. Returns on non-investment-grade bonds are not strongly correlated to either asset class, moving slightly more in step with equities than anything else. They offer better returns than high-grade corporate or government bonds - even after allowing for higher default rates and any subsequent recoveries - and are not as volatile as equities. European buyers have come forward in droves this year to buy six recent European-currency high-yield bond deals. Private banks and leveraged investors, including specialist funds and commercial banks, have been to the fore.
Mainstream investors including insurance companies, pension fund and investment management groups may be coming round. "Some investors see these high-yield deals as a natural successor to emerging market debt," says David Munves, executive director at Lehman Brothers. "It will be a market that should continue to grow."