Euro bond market rally brings opportunities

The European High Yield market has rebounded strongly from lows in November of last year, according to Andrew Lake, co-manager of the award-winning F&C European High Yield Bond Fund. Surprisingly, the riskier end of the spectrum, such as CCC-rated bonds, has significantly outperformed the rest of the market whilst BB-rated issues only returned 6.84% in January.

Lake explains "The size of the European market means that large issuers have a disproportionate affect so much of the CCC move can be explained by the rally in Autos, particularly GMAC and GM. Whilst there have been inflows into the asset class, much of the price activity is not reflective of actual trading. Inventory is scarce as a result of paring back risk during 2008 and investors are reluctant to sell bonds that they have held down to current levels. Additionally, most investors are focussing on the same companies and sectors, adding to the liquidity problem that the market is facing at present".

However, Lake believes that the current rally is not sustainable based on worsening economic data, the prospect of increased defaults and continued problems in the finance sector.

Lack of a strong new issue calendar could result in the market continuing to tighten in the short term as investors do have cash to spend. However, there will be significant market volatility this year and one should not be complacent over the current rally. Lake's view is that there will be some recovery/stabilisation towards the end of the year and any market widening will lead to buying opportunities.

Lake concludes "Despite the bleak economic backdrop, there are still attractive opportunities at these levels. Telecom continues to be a good solid sector and telecom company Wind remains one of my top picks in Europe. I also like German cable companies as a core holding and remain positive on consumer non-cyclical stock. My focus is on companies at depressed prices that I believe will survive the downturn, in-keeping with our strategy of gradually increasing risk in the portfolio for 2009".