By Anna Isaac

Europe's riskiest corporate debt has rallied to precrisis levels, mirroring gains in U.S. speculative-grade bonds, as investors seeking better returns pour money into a market that has seen a dearth of new bond sales.

The spread, or extra yield above government bonds that investors demand to own junk bonds, has returned toward levels seen before the selloff in March on both sides of the Atlantic. In Europe, the spread tightened to 4.69 percentage points, the lowest since March 6, as measured by ICE Indices. In the U.S., the spread has narrowed to 5.51 points.

That masks key differences in the dynamics for the two markets.

U.S. companies have rushed to raise much-needed cash from investors in the subinvestment-grade market in the weeks since the worst of the rout. In Europe, activity levels have remained low.

Companies including Nokia Corp. and Piraeus Bank SA raised $36.2 billion this year through May from selling high-yield debt in Europe, according to data from Dealogic. That compared with the $152.6 billion raised in speculative-grade debt in the U.S., and the $42.6 billion raised by European high-yield debt during the same period of 2019.

"Overall, there is a shortage of high-yield assets for funds to buy," said Daniel Lamy, European credit strategist at JPMorgan Chase & Co. "When deals have come in the high-yield market in Europe, they have been well received."

One reason for the shortage of new bonds is the scope of central bank and government intervention in each market. The Federal Reserve has moved to support debt from companies that have recently lost their investment-grade rating, known as fallen angels.

The European Central Bank hasn't implemented a similar measure, though there has been speculation among investors that it will. On Tuesday, ECB official Olli Rehn said he was keeping an "open mind" in the debate over whether policy makers should include the purchase of such high-yield bonds as part of wider measures to backstop credit markets, according to Reuters.

"Europe, U.S., and emerging markets are all at different stages of recovery, with the U.S. leading the pack," said Andrey Kuznetsov, senior portfolio manager at the international business of Federated Hermes. "Europe is very supportive of the investment-grade market, but has done little so far in terms of commitment, in terms of supporting fallen angels and the lower-rated part of the credit spectrum."

Other factors including the attractiveness of dollar-denominated debt as a result of lower hedging costs, has also given the U.S. high-yield market an edge over Europe, Mr. Kuznetsov said. The American economic data has also been more encouraging, and boosted market expectations among investors there, he said.

The availability of government-guaranteed loans from banks and other forms of financing in Europe means that high-yield credit markets haven't been the first port of call for companies looking to raise funds, according to Tomas Hirst, European credit analyst at CreditSights. That has left investors looking to dip into Europe's high-yield market with few options to select from.

"The European market rally will continue until we get a big pickup in supply," Mr. Hirst said.

The combination of the dearth of new bond sales in Europe and the offer from some national governments to guarantee loans to businesses is also making it hard to work out likely default rates, investors and analysts said.

The European speculative-grade corporate default rate could rise to 8.5% by March 2021, from 2.4% in March this year, according to projections this week from S&P Global. While monetary and fiscal support mechanisms could curtail the number of projected defaults in the short term, those steps are adding to companies' debt loads when revenue has dropped, and may lead to "a protracted period of higher defaults," the rating company warned.

"Central banks are doing all they can to support liquidity. If you can provide liquidity in the short term for companies, then that pushes back default rates," said David Newman, chief investment officer for global high yield at Allianz Global Investors. "If you look at credit spreads versus actual realized default rates, credit spreads move in advance of what actually happens. Roughly nine months ahead."

The scale of intervention has likely flattened the cumulative impact of defaults in both the U.S. and Europe, investors and analysts said. That could be pushing out a tranche of defaults to the first quarter of next year, investors said.

Meanwhile, money is sitting on the sidelines in Europe. Investors are looking to allocate cash and the savings that have been accumulated as people brace for the impact of a prolonged economic crisis. The lack of supply of high-yield credit presents a problem, as this would be an attractive option amid low interest rates.

The situation may shift soon, however. Investors are now concerned that the ECB will step in to buy high-yield debt and lower borrowing costs for companies if there isn't a pickup in transactions.

"I see the next three or four weeks as critical to see whether or not the European market is able to absorb more issuance before the summer lull," said Mr. Kuznetsov. "If that's not the case by September, the market will need more support from the ECB in one form or another."

In the U.S., the yield on the 10-year Treasury note slipped to 0.829%, from 0.883% on Monday. Yields move inversely to bond prices.

--Pat Minczeski contributed to this article.

Write to Anna Isaac at anna.isaac@wsj.com