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Highest-Rated Junk Loans Set to Beat Bonds, Credit Suisse Says

Junk-debt investors looking to boost returns without buying lower-rated bonds should consider moving into loans ranked in the highest speculative-grade tier, according to Credit Suisse Group AG.

Relative yields for bonds with junk ratings of BB are 56 basis points, or 0.56 percentage point, more than for loans with equivalent ratings, a gap that’s about half the average since July 2009, Credit Suisse analysts Jonathan Blau, Daniel Sweeney and Karen Friedlander wrote in a report today.

When relative yields have moved that close together in previous periods, loans generated greater returns in the next three months, suggesting “a switch into BB loans is likely to result in outperformance,” the analysts said.

“Since July 2009, there has been a fairly consistent relationship between the relative yields of BB bonds and loans and the subsequent differential in their performance,” they said.

Bonds rated in the BB tier are yielding an average 5.41 percent, 23 basis points more than a record low of 5.18 percent on March 1, the analysts said. Junk debt is rated less than Baa3 by Moody’s Investors Service and below BBB- by Standard & Poor’s.

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