GOING LONG : THE SEARCH FOR YIELD / THE WALL STREET JOURNAL

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SEPTEMBER 24, 2009, 12:28 P.M. ET

Going Long

By RICHARD BARLEY

The search for yield is pushing investors to tie their money up for longer and longer. Loose monetary policy and a steep yield curve have caused a flowering in sales of long-dated corporate bonds as the European market grows ever deeper.

In the past, continental European companies turned to dollar or sterling markets for ready access to long-dated funding. In 2007, for instance, there were 180 dollar-denominated bond issues with maturities of 11 years or more totalling $108 billion, versus just 26 euro-denominated sales totalling $21 billion, according to Dealogic.

But September has seen a rash of 15-year euro-denominated bond sales: utility EdF issued a 2.5 billion euros ($3.7 billion) bond that was the largest ever issued in the currency with a maturity of longer than 10 years. Nuclear power group Areva and Dutch telecom company KPN have also seen strong demand for such issues. Bankers and analysts expect more to follow in their footsteps.

The move is being driven by the confluence of tightening credit spreads and a government bond yield curve that is very steep, but anchored by extremely low short-term rates. This creates a window for issuers, as overall yields are low by historical standards. KPN, for example, is paying a coupon of 5.625% on its 15-year deal, after paying 6.25% for a five-year bond as recently as January. It also creates demand from investors keen to hit absolute return targets without buying junk bonds. With five-year Bunds yielding just 2.4% and 10-year yields at 3.3%, the vast majority of investment-grade issues are now coming in with coupons of less than 5%.

True, the continental European market still doesn't have the depth of demand for long-dated bonds that exists in the U.S. and U.K. thanks to pension funds trying to match their liabilities. But more and more U.K. funds are gaining exposure to euro instruments, and the pensions industry in Europe is likely to grow as debt-burdened states look to private providers. Europe's corporate bond market, already displacing the traditional role of banks in funding the continent's biggest companies at shorter maturities, is taking another step forward.

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