For The First Time Ever, European Equities Yield More Than Junk Bonds

Jon Economy

Last week, when looking at the the distortion and absurdity unleashed by the ECB’s asset purchase program upon European capital markets, we showed the unprecedented collapse in European junk bond yields as captured by the effective yield of the BofA/ML Euro High Yield Index, which is now trading just shy of all time lows, having dropped below 3% at the end of April, and printed at 2.79% on May 23, within bps of record lows…

… roughly 50 bps wider than where the the US 10Y is trading at this moment, and inside the 30Y US Treasury. Assuming a 1.9% European CPI (as of April), this means that the real rate of return on Europe’s junk yields is now 0.89%. But we digress.
So why does European junk debt trade with seemingly no more risk than the world’s most risk-free security? Simple: expectations that the ECB will keep buying it, and so far it has. In fact, yesterday DB’s Jim Reid reported that according to “the latest ECB CSPP numbers were out yesterday and I was surprised to see the average daily corporate purchases at 401mn last week, notably above the average daily run rate of 365mn since the program started. So back in April and early May it looked like a broadly equal CSPP/PSPP split but last week’s numbers gives us the possibility that CSPP hasn’t been tapered as much after all.”

This post was published at Zero Hedge on May 24, 2017.