Bond rush disguises lack of high-yield assets With a temporary solution to the US fiscal cliff agreed and the European Central Bank's pledge to backstop the euro soothing nerves, US companies including Ford Motor and General Electric Capital have taken advantage of a broad market rally. Last week they sold over $12bn in new debt in a single day. European banks and Chinese property developers were also quick off the mark. Yet amid the market glow, investors are fretting that the expected January flurry will disguise a more fundamental issue - a lack of supply of high-yielding assets. With some government bond yields at record lows, investors last year chased returns in other parts of the bond market. Now they could struggle to repeat 2012"s performance. Analysts predict that debt sales in the US this year will fall short of the record levels of 2012, when $1.4tn of bonds were sold. Barclays estimates overall debt sales in the US this year of $1tn, with up to $300bn coming from borrowers with ratings below investment-grade, down from $345bn in 2011. Société Générale, meanwhile, predicts that European corporate bond issuance could be down by a third this year, with that from financial institutions falling 10 per cent. "There is very high demand for credit assets at the moment, with too much money chasing too few assets." says Neil Williamson, head of European credit research at Aberdeen Asset Management. The worry is there is not much out there to buy with any yield, especially if you are sensitive to ratings and volatility. Part of the overall supply issue relates to banks either being reliant on central bank funding or shrinking their balance sheets in response to regulatory changes and weak growth. Lenders have less need to tap public debt market. In Europe there is also less pent-up demand than at the start of 2012 when banks raced to issue, buoyed by an injection of cheap funding from the ECB. Mario Draghi's "whatever it takes" speech and the ECB government bond buying scheme launch in September paved the way for a strong second half to 2012 during which banks from the eurozone periphery that were not able to access markets issued, while those from the core started pre-funding for 2013. Many non-financial corporates, meanwhile, have already taken advantage of record low borrowing costs to fund in the capital markets. Global high-yield corporate bond issuance hit a record in 2012. And in Europe, where companies have historically relied on borrowing directly from banks, net corporate bond issuance overtook loan issuance. If corporate volumes are going to get even near last year, I expect we will need to see corporate M&A activity, and associated refinancing. Undoubtedly, if companies feel a better macro environment, it may encourage them to put surplus cash on their balance sheet to work," says Mark Lewellen, head of European corporate DCM at Barclays. "Even if funding at historically low yields is possible, if you don't need the money, then it is expensive to have it just sitting on your balance sheet," he says. Others hope that because yields on corporate debt are so low - with the average yield on junk bonds in the US falling below 6 per cent for the first time last week - they will continue to entice companies. "For borrowers, these rates are still extremely attractive," says Randy Parrish, head of US high yield for ING US Investment Management. Demetrio Salorio, global head of debt capital markets at SocGen, says that while the start to this year feels less "exuberant," there is nevertheless a good pipeline of deals. More importantly, there are "fewer clouds on the horizon" to knock sentiment. He says bank and corporate issuers are relaxed, aware that investors are sitting on lots of cash but finding that there is not enough supply. Nevertheless, some issuers in countries such as Spain and Italy, which were locked out of funding markets for parts of last year, are likely to take advantage of investor demand for higher-yielding assets Little surprise then that there was huge investor demand for BBVA's senior unsecured debt issue last week and Unicredit's covered bond on Monday. The hunt for yield also aided high-yield issues from Chinese real estate developers Country Garden and Kaisa last week, both of which were oversubscribed. "Investors are looking for returns further down the credit spectrum - namely high-yield bonds," said Herman van den Wall Bake, head of fixed income capital markets, Asia at Deutsche Bank. That's where you'll see a lot of interest, at least in the near term. Eric Brard, global head of fixed income at Amundi, says he is less concerned about overall supply but does remain focused on the hunt for yield. He sees 2012 as a transition year when investors were more concerned about the general trends. In 2013, he expects strong demand for riskier assets in the periphery but says investors will need to be more specific about which credits they target. It's going to be more about name picking, and it will be more favourable to portfolio mangers with the ability to analyse individual credits.