European Junk Bonds Surge as Investors Flee US Markets
A wave of capital is flowing out of US markets and into European corporate debt, driving a record surge in sales of high-yield, or “junk,” bonds. This shift is largely attributed to anxieties surrounding President Donald Trump’s trade policies and growing concerns about the US government’s borrowing needs.
Sales of risky European corporate debt reached an unprecedented €23 billion in June, according to data from JPMorgan, surpassing the previous monthly record set in June 2021 by approximately €5 billion. The month also witnessed a historic 44 bond deals, as reported by PitchBook. “The market is drowning in new deals,” noted an investor at a European credit hedge fund.
The increased demand is enabling companies previously struggling to access capital to tap into the bond market. This is fueled by falling borrowing costs, as investors seek alternatives to US assets. While the US stock market experienced a strong rebound in the second quarter, a broader trend away from dollar-denominated bonds has persisted, contributing to the greenback’s weakest start to the year in over half a century. Conversely, European high-yield bond funds have enjoyed seven consecutive weeks of inflows, as indicated by Bank of America data.
The appetite for risk is so substantial that even companies with challenging histories are finding success. Czechoslovak Group, a bullets manufacturer, and Flora, a butter-substitute maker owned by KKR, were both able to issue bonds in the past week, accessing markets that were previously closed to them. Flora’s deal was particularly noteworthy, marking the first issuance by a triple C-rated company – among the lowest in the credit spectrum – in nearly a year. The company was able to issue bonds under Norwegian law, a jurisdiction known for less stringent disclosure requirements.
Flora priced €400 million of bonds on Monday with a yield of 8.625%, a significant reduction of roughly four percentage points compared to its existing debt with a similar rating, despite having previously withdrawn a bond offering. Similarly, Prague-based CSG secured new five-year dollar and euro debt at yields of 6.5% and 5.25% respectively, a dramatic decrease from the 11% interest rate it paid on a $775 million bond in November, as reported by the Financial Times.
Even Carnival, the world’s largest cruise operator, which recently faced double-digit interest rates on deals secured by its cruise ships, is now offering new euro-denominated debt to investors. High yield spreads – the premium risky borrowers pay over government debt – have narrowed from over 4 percentage points in April to 3.1 percentage points at the end of June, according to Ice BofA data. “You can print pretty high risk stuff at very attractive rates at the moment. The market is running red hot,” one high-yield bond investor explained. “There are inflows coming into our market as people are looking to diversify away from the US.”
President Trump’s trade policies are a key driver of this shift, prompting investors to reassess their long-held preference for the US market due to increased uncertainty. “There’s a huge amount of capital flowing into the asset class… and we are starting to see larger managers focus more on Europe,” said Ben Thompson, head of Emea leveraged finance capital markets at JPMorgan.
Issuers with complex financial instruments, such as payment-in-kind bonds – where interest is rolled into the principal – are also attracting significant investment. Footwear giant Skechers recently priced €1 billion of bonds, alongside $2.2 billion of bonds including a payment-in-kind feature, increasing the euro portion from an initial offering of €750 million. “Managers are desperate to invest,” a leveraged finance banker stated.
