By Paul J. Davies 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 23, 2020).

Spanish bridge and railway builders topped few lists for winning bets at the start of 2020, but speculative-grade bonds in two such companies have jumped in price this year.

Bonds of construction company Grupo Aldesa SA, which were trading at less than 55% of face value on Dec. 27, hit 96.1% by Tuesday's close, after China Railway Construction Corp. agreed to invest EUR250 million ($277 million) in the struggling Spanish firm. Its peer, Obrascón Huarte Lain SA, saw the price of one of its bonds climb to about 80% of face value by the end of Tuesday, from less than 70%.

The two companies are extreme examples of the rally in risky European corporate bonds -- mirroring the advance in U.S. high-yield debt -- since the start of December.

Other European corporate bonds that have rallied include debt from Telecom Italia SpA, as well as some subordinated debt from the long-troubled Italian bank Banca Monte dei Paschi di Siena SpA.

Investors globally have jumped back into a range of risky and volatile assets in the past few weeks, including leveraged loans, stocks like Tesla Inc. and commodities such as copper. This suggests a rush for returns at the start of a year when many expect little change in economic growth or central-bank policies and less political uncertainty after the U.S. and China sealed a basic initial trade pact.

European high-yield, or junk, bonds were forecast by many analysts and investors to be a strong performer for 2020. However, the sharp gains in recent weeks are prompting speculation that there may be too much hype in the European junk-bond market and that the performance expected for the year may be done before January ends.

"It makes me think that a lot of this rally is quite speculative," said Tomas Hirst, European credit strategist at research firm CreditSights. "Some high-yield bonds are trading on rumor or hope, rather than a real shift in sentiment."

Easier monetary policy in the U.S. and Europe didn't generate the same kind of boost to high-yield bonds in 2019 as it did to safer bonds and equities. And risks remain high for many overly indebted companies: Their financial performance isn't improving and economic growth isn't expected to rebound significantly in 2020.

Still, the European Central Bank's resumption of its bond-buying program, which includes investment-grade corporate debt, is pushing investors to move funds into riskier assets and creating an important drip-down effect, according to Marc Kemp, fund manager at BlueBay Asset Management.

"The rally since late December has taken some of the shine out," Mr. Kemp said. But the ICE BofA Euro High Yield Index may still tighten by another 0.2 to 0.3 percentage point to below the "psychologically important" 3% level, he said.

Investors face a quandary because the rally has already been strong. The extra yield on top of government bonds that investors demand to own high-yield debt, known as the spread, has fallen since early December.

The ICE BofA Euro High Yield Index spread dropped to 3.05 percentage points by Tuesday's close, from 3.55 points. The U.S. equivalent index went to 3.47 from 4.14 in the same period.

That drop in European spreads is all the moves that Daniel Lamy, credit strategist at JPMorgan Chase, had forecast for the end of 2020.

"It is hard to see the current macro backdrop leading to more spread tightening," Mr. Lamy said. "However, there is still a lot of investor demand for credit exposure and central banks are not likely to tighten policy this year."

Spreads are still above the record lows of less than 2.3 points set in October 2017. But euro-area growth was stronger then and a trade war with the U.S. wasn't on the table, Mr. Lamy said.

Other investors think there could be further to go.

Simon White, managing editor of research firm Variant Perception, expects spreads for both U.S. and European speculative-grade bonds to move slightly higher this year, although not as much as for investment-grade bonds.

"There are clear signs that the credit cycle is maturing," Mr. White said.

"The fact is that investors are looking through the fundamentals, but central banks remain willing to support markets," he said.

Write to Paul J. Davies at paul.davies@wsj.com

 

(END) Dow Jones Newswires

January 23, 2020 02:47 ET (07:47 GMT)

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