EUROPE - Solvency II regulations will see interest in corporate bonds reduce dramatically, a new survey by Fitch ratings has predicted.

According to the agency's 'European Senior Fixed-Income Investor Survey Q2, 2011', an increasing number of European investors are also concerned about rising inflation.

However, despite 44% predicting that Solvency II will reduce appetite for corporate bonds once introduced in 2013, 42% did not expect there to be any changes whatsoever, while the remaining 12% believed it would in fact lead to more investors buying up long-dated corporate debt.

Asked where they were most and least likely to invest if they had a nominal amount at their disposal, investors cited developed market sovereign debt as their least favourite asset class, with cash coming a distant second.

Monica Insoll, managing director in Fitch's credit market research group, said: "High-yield corporates remained in top spot as most favoured choice by investors, although by a reduced margin compared with the previous quarter."

Insoll's colleague Edward Eyerman, managing director of the company's EMEA leveraged finance team, predicted demand for high-yield would depress certain markets even further.

"Such rapid growth in demand continues to draw supply from more challenged sectors and includes riskier structures, including more CCC-rated issuance. Consequently, the outlook for default rates to increase from current lows may shift toward the second half of 2011 and into 2012."

He said that, at present, €20bn in high-yield debt had been issued, but if the rate of issuance were to continue, then it would surpass the €34bn issued by last summer, a record at the time.

Meanwhile, 60% of investors also feared that inflation would affect the pricing of corporate bonds, with 9% even stating their belief that it would affect underlying credit.