It’s easy to hate junk bonds paying yields that are the lowest ever. But Wall Street’s biggest banks are undaunted.
The 22 primary dealers that do business with the Federal Reserve added a net $2.16 billion of high-yield bonds to their books in the week ended June 4. That’s the biggest increase since the Fed started reporting the data in April 2013.
These are the same junk bonds that a credit-fund manager who worked alongside Michael Milken when he was pioneering the market in the 1980s says have been whipped into a frenzy.
“We would describe the public markets for high-yield bonds as frothy,” Bennett Goodman, co-founder of Blackstone Group LP’s GSO Capital unit said yesterday. He said he was “rooting for a correction” as yields fall to a record low 5.78 percent.
It’s unclear what would prompt such a deterioration in values right now. Default rates are still falling. Companies can borrow at previously unheard-of rates. They’ve pushed out their debt maturities for years. And while the U.S. economy isn’t growing as fast as perhaps central bankers would like, it’s still expanding enough to keep companies out of bankruptcy.
Mutual-fund investors have poured $7.5 billion into high-yield bond funds this year, and $296 million so far this month, Wells Fargo & Co. data show. Primary dealers boosted their holdings to a net $7.7 billion in June from $5.6 billion in the week ended May 28, Fed data show.
All of that’s boosting prices of the debt, giving investors in U.S. junk bonds average gains of 5.3 percent this year, Bank of America Merrill Lynch index data show.
There’s a good chance junk-debt values will eventually plunge. For now, though, it just seems like too many still believe in the rally.