THE EUROPEAN CREDIT market's growth shows few signs of slowing in the medium term despite the longevity of the bull market and clear signs that structures and valuations are being stretched beyond historical limits. Indeed, debt capital markets bankers predict another upsurge in credit as a confluence of factors conspires to feed a party that continues to flourish. Whatever the sector – investment grade, high yield, emerging markets or structured credit – or the sub-sector – financials, corporate or public sector – the picture is largely the same: investors are still in buying mode and they don't mind paying top prices.
In many respects, debt capital markets have never been so straightforward. Spreads are tight, yields are low and the regulatory and economic environments offer constructive conditions for borrowers. Meanwhile, heightened liquidity has pushed the hunt for yield to the forefront, making it the overriding investor theme over the past 18 months. This has manifested itself in increased demand for duration, greater acceptance of subordination, appetite for riskier standalone credits and/or various forms of structured product.
Making hay
It is sometimes difficult to distinguish secular growth in fixed-income product, which has long been forecast as part of the maturity process of financial markets, from signals of a frothy market that is in dire need of a correction.