Sometimes charts tell a story that is not entirely obvious. And since everyone is focused on Europe, here is a chart of the Credit Suisse Western European High Yield Index, tracking non-investment grade bonds of companies in Europe. Instead of the index returns however, the chart shows the average duration of bonds that are part of the index.
|Average Duration of the Credit Suisse Western European HY Index (Source: CS)|
Why would the duration of European bonds increase through August and then start dropping off?
Let's first address the increase. The chart below shows the average bond price in the index as percent of par. Bonds traded at a 2-3% premium to par early in the year but started selling off in May.
|Average Price as % of Par of the Credit Suisse Western European HY Index (Source: CS)|
Now the question is why did durations start shortening in August? The answer is quite simple, yet telling. High Yield new issue came to a grinding halt in Europe. The primary markets effectively shut down. And now time took over, and as time went on, maturities got shorter and so did durations. And there was no new longer duration paper to add to the index to keep the duration constant. The next chart shows average years to maturity of the CS Western European HY Index.
|Average Maturity of the Credit Suisse Western European HY Index (Source: CS)|
Whether this market opens up again remains a big question. With some sovereign bonds trading at HY levels, the corporate yields would need to be really high or the firms really strong to attract buyers. In the mean time durations in Europe will continue declining.