High-Yield Debt Already Achieved Most of 2012 Returns, RBS Says

Speculative-grade bonds that have returned 11.6 percent this year have recorded most of the gains that can be expected in 2012, according to analysts at Royal Bank of Scotland Group Plc.

High-yield, high-risk bonds lost 0.04 percent during the week ended Sept. 21, the first time in more than a month that the debt failed to post a positive gain, analysts led by Edward Marrinan wrote in a Sept. 28 research report. They lost 0.69 percent last week through Sept. 27.

The Federal Reserve’s decision to hold interest rates near zero through mid-2015 disproportionately benefited junk bonds as record amounts of money flowed into funds that invest in the debt, pushing yields to the lowest ever. Investors such as Franklin Resources Inc. (BEN) and Western Asset Management have begun reducing high-yield holdings, with the expectation that bond prices will decline.

“The total return performance of the high-yield asset class has lagged rather notably, as the boost from the quantitative easing announcements has apparently faded and the return of macroeconomic and geopolitical headline risk has tempered investors’ appetite for risk,” according to the report. “We do not expect this asset class to generate material additional capital gains at current dollar prices, and instead look for carry to drive total return performance over the balance of the year.”

The average yield on junk bonds fell to a record-low 6.95 percent Sept. 19, according to Bank of America Merrill Lynch index data. It reached 7.12 percent Sept. 28. Speculative-grade bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poors.

To contact the reporter on this story: David Holley in New York at dholley8@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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