OREANDA-NEWS. March 14, 2016. European investors still see high-yield debt as an attractive investment despite growing expectations that fundamental credit conditions in the sector will deteriorate over the next year, according to Fitch Ratings' latest survey of senior credit investors.

High-yield debt was the second-most popular investment option in the survey, which closed 12 February, with 22% of respondents saying it is where they would choose to make a marginal investment. However a further 14% said it is the last place they would choose to put more money, behind only emerging-market corporates and sovereigns as the least-favoured investment options.

This split in opinion reflects increasing uncertainty over the high-yield sector as investors try to balance attractive-looking valuations with renewed concerns about economic weakness and expectations of deteriorating credit conditions. Our survey found 30% of respondents see high-yield debt as undervalued, up from 24% in December, but 72% now expect credit conditions in high-yield to deteriorate over the next year, compared to 55% in the previous survey.

The perception of better value in the high-yield sector has coincided with a fall in prices and a widening of European high-yield credit spreads to their highest level in three-and-a-half years. Market swings have been exacerbated by limited liquidity and credit rating downgrades that prevent some funds from investing in the assets. European high-yield issuance volumes in the first two months of the year dropped 90% year-on-year to EUR3.9bn, their lowest level since 2008.

While they still see opportunities in high-yield, investors have become increasingly selective, spurning the lower end of the rating spectrum as they seek to avoid losses. This is highlighted by a steady rise in the spread between 'CCC' and 'B' category bonds since the start of 2015. This spread was 875bp at the end of February, compared to around 400bp in late 2014. The spread between 'B' and 'BB' category bonds has widened by 7% to 270bp since the start of the year, but is still below its level at the start of 2015.

While concerns over credit conditions have grown, we expect the European high-yield default rate to remain below 1% in 2016. This reflects the high proportion of 'BB' category bonds, which make up two thirds of the market, as well as low debt service burdens across the broader market, which are supported by the European Central Bank's quantitative easing programme. A gradual shift to longer tenors over the last few years has extended high-yield maturity profiles.

Click here for the full interactive report, European Senior Fixed-Income Investor Survey 1Q16, which is available at www.fitchratings.com. The survey represents the views of 64 investors, managing an estimated EUR8.0trn of fixed-income assets.