LONDON: What does "high yield" mean in 2013? How about 7-year paper yielding less than 3 percent? It sound as distant from the macho returns of Drexel Burnham's eighties "junk bond" market as smartphones are from Gordon Gekko's brick-sized mobile.
Fresenius, the German dialysis and hospitals group, has just sold 500 million euros of bonds paying 2.875 percent. That looks like a record low yield for Europe's high-yield market.
The company is a trusted repeat borrower, with the highest possible non-investment grade rating, but this is only an extreme case of a general trend.
Average yields on European junk bonds have almost halved in a year, to 5.2 percent, while issuance volumes have broken records.
Fresenius was helped by low default rates on junk-rated debt - little more than half the 30-year average. The sector's financial health helps explain the increasing willingness of debt investors to go for lower-rated companies.
But the low quality market shines when investment-grade debt offers paltry yields. Besides, all companies look safer as formerly risk-free governments become shakier.
In any case, bond buyers think in relative terms. The Fresenius paper yielded 178 basis points more than German Bunds. Deutsche Bank data shows bonds of this rating and maturity only need a spread of 128 basis points to compensate for the likely default risk.
But If central banks increase rates sometime before the Fresenius bonds mature, the price is certain to fall. The era of "high yield" at 3 percent could quickly look as old fashioned as that of shoulder pads and red braces.
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