Investment bankers devoted hefty resources in 1997 and 1998 to promoting and gearing up for a European high-yield bond market. Following the Russian crisis, it collapsed. But proponents of European junk won't let a catastrophic market crash deter them. They argue that plummeting values could be the market's making. Spreads that have widened beyond all economic justification have finally made high yield sexy for the end-investor.
In a bulletin called "Every Cloud...?", chief European bond strategist at Barclays Capital Gary Jenkins and colleagues observe that despite the hype accompanying the birth of European high-yield since early 1997, the region's real investors generally stayed aloof. Bond issues relied on proprietary traders and the so-called backstop bid from the US. Europeans waited for proof that high-yield was here to stay - and for better bargains. Jenkins argues that "the sustainability of the market could not receive a more severe test than the worst economic turbulence since 1929".
Jenkins advises European investors to spend early 1999 studying and scavenging. Thereafter, the market will begin to pick up as post-Emu investors seek high returns. And they are more likely to trust familiar, nearby firms such as mobile-phone provider Orange than those from developing countries with opaque financial practices.