The Anatomy of the High Yield Bond Market: After Two Decades of Activity-Implications for Europe

Abstract

Until the last few years, the high yield bond market was essentially a solely U.S. capital market phenomena. That this non-investment grade, fixed income asset class has grown so impressively in the U.S. and now is possibly on the verge of an explosion of new issuance in Europe is primarily based on a simple summary performance statistic -- an average annual net return to investors of about 250 basis points per year above the risk-free rate for the past two decades. Just as the U.S. high yield market rebounded from its debacles in the late 1980's and the Mexican Eurobond market from its peso crisis in early 1995, the long-term key factor in Europe will be the fundamental health of firms issuing bonds. Despite short-term gyrations and flights to quality, there is still no substitute for careful and objective analysis of the underlying firms and securities that comprise the market.