Junk Bonds Revive on Bernanke `Sub-par' Economy: Credit Markets
June 22 (Bloomberg) -- Dan Fuss, vice chairman at Loomis Sayles Co., talks with Bloomberg's Matt Miller and Carol Massar about the availability of credit for companies and investment in corporate bonds. Fuss, speaking on Bloomberg Television's "Street Smart," also discusses the outlook for bond yields and Federal Reserve monetary policy. (Source: Bloomberg)
Investors are returning to junk bonds after the worst month since 2008 on speculation the economy is growing fast enough to avert corporate defaults without sparking inflation.
“High yield is the place to be,” said Manny Labrinos, a money manager at Nuveen Investment Management who oversees $1.8 billion of fixed-income assets. “Sub-par growth is somewhat of a Goldilocks scenario because it means rates stay low and people are still going to reach for yield.”
High-risk debt has returned 1.76 percent in June, almost double the gain of investment-grade corporate bonds, Bank of America Merrill Lynch index data show. Underscoring demand, CNH Global NV, the Fiat SpA unit that makes tractors and harvesters, boosted the size of its speculative-grade offering by 50 percent to $1.5 billion in the largest junk-bond sale since April 20.
The rally is paring a 3.52 percent loss in May as credit- ratings companies upgrade borrowers at the fastest pace since at least 2000 amid rising corporate profits. Federal Reserve officials retained a pledge to keep the benchmark interest rate at a record low for an “extended period,” leaving the overnight interbank lending target unchanged at a two-day meeting.
Moody’s Investors Service upgraded 87 high-yield companies and downgraded 49 in the quarter, a ratio of 1.78 times, Bloomberg data show.
Great Recession ‘Survivors’
“Default rates will be well below most people’s estimates at the beginning of the year,” said Mark Durbiano, head of high yield at Federated Investors Inc., where he oversees $4 billion of speculative-grade debt. “The market is pretty much made up of what I call survivors of the Great Recession, where you defaulted out a lot of the weaker issuers and new issuers are creditworthy.”
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of government debt was unchanged at 194 basis points, or 1.94 percentage point, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Yields averaged 4.027 percent.
Grupo Bimbo SAB, the world’s largest bread maker, plans to sell $800 million of 10-year dollar bonds that may pay 180 basis points more than similar-maturity U.S. Treasuries, according to a person familiar with the Mexico City-based company’s transaction.
Benchmark indicators of credit risk in the U.S. and Europe rose. The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, climbed 1.24 basis point to a mid-price of 115.8 basis points as of 2:26 p.m. in New York, the second daily increase, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings increased 7.5 basis points to 125.5, Markit prices show.
Bondholder Protection
Both indexes typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Issuance of speculative-grade debt, ranked below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s, is reviving after Spain sold bonds last week and equity analysts boosted second-quarter estimates for companies in the S&P 500 Index to $19.72 per share from $19.11, according to JPMorgan.
CNH Global
CNH Global’s 7.875 percent notes maturing in December 2017 priced to yield 536 basis points more than similar-maturity Treasuries, Bloomberg data show. The offering from the Amsterdam-based unit of Italian automaker Fiat that makes Case and New Holland agricultural equipment adds to $4.3 billion of high-yield bonds sold this month, Bloomberg data show. The notes rose 1.8 cents to a mid-price of 101.125 cents on the dollar in their first day of trading, according to Jefferies Group Inc.
The sale was the biggest U.S. high-yield issue since CF Industries Holdings Inc., the Deerfield, Illinois-based fertilizer maker acquiring Terra Industries Inc., sold $1.6 billion of 8- and 10-year notes on April 20, according to Bloomberg data.
Junk bond sales declined 80 percent last month to $6.76 billion from $33.4 billion in April as European banks’ funding costs soared and investors sought the safety of U.S. government debt.
High-Yield Inflows
Investors put $164 million into high-yield bond funds in the week ended June 16 after withdrawing $6.27 billion in the five previous periods, according to EPFR Global, a Cambridge, Massachusetts-based research firm that tracks asset allocations.
Last month’s decline in junk bond returns was the worst since an 8.4 percent drop in November 2008, according to Bank of America Merrill Lynch’s U.S. High Yield Master II index. Investment-grade bonds have returned 0.98 percent in June, following a loss of 0.57 percent last month.
“Sentiment has definitely improved from a very low base at the beginning of the month,” said James Lee, a fixed-income analyst at Calvert Asset Management in Bethesda, Maryland, which has $7.6 billion of fixed-income assets under management. “The high-yield market is recovering and investors have money to put to work and they are looking for new deals to do it.”
Unemployment Rate
Fed Chairman Ben S. Bernanke is trying to cut unemployment that’s close to a 26-year-high and maintain the recovery as new- home sales slide and growth in private payrolls weakens. He must also contend with fallout from the European debt crisis, which has pushed share prices lower and threatens to shake consumer and business confidence.
The central bank left the overnight interbank lending rate target unchanged in a range of zero to 0.25 percent, where it’s been since December 2008. High unemployment, low inflation and stable price expectations “are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” the Fed said today, repeating language from every policy meeting since March 2009.
Corporate spreads should decrease based on the rate that companies are defaulting on debt, said Martin Fridson, a global credit strategist at BNP Paribas Asset Management in New York.
The trailing three-month default rate of 2.95 percent on May 31 signals that the spread on high-yield debt should be 485 basis points, Fridson said, citing BNP and Merrill Lynch index data going back to 1996. Relative yields over government debt have declined 23 basis points this month to 675 basis points, Bank of America Merrill Lynch index data show.
“I think we can say with confidence that the spread is too wide relative to the prevailing default rate,” Fridson said. “I attribute that fact to the anxiety about sovereign risk. More is coming out suggesting that the banks will be covered and those concerns are somewhat overstated.”
To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Tim Catts in New York at tcatts1@bloomberg.net
Rate These Stories
Rate this Page