JPMorgan, Barclays Boost Forecasts on Junk-Bond Returns for 2013

JPMorgan Chase & Co. and Barclays Plc are lifting their forecasts for U.S. junk-bond returns as this year’s rally exceeds the expectations of top-rated credit strategists.

Barclays analysts predict high-yield bonds may gain 8 percent in 2013, as much as four percentage points more than their original expectation, wrote strategists led by Jeffrey Meli and Bradley Rogoff in a May 17 report. JPMorgan sees “modest upside risk to our original full-year return forecast of 7 to 8 percent for U.S. high yield” and now expects gains of as much as 10 percent, according to strategists led by Jan Loeys.

Speculative-grade bonds have posted average annual returns of 21 percent since 2008 as the Federal Reserve pumped more than $2.5 trillion into the financial system to galvanize economic growth. Junk notes have gained 5.3 percent this year, almost the same as in the similar period of 2012, according to Bank of America Merrill Lynch index data, and exceeding the 3.1 percent full-year 2013 prediction in December by Morgan Stanley strategists led by Adam Richmond.

Junk debt’s “value is still higher than fixed-income alternatives given low defaults and volatility,” wrote JPMorgan strategists in a May 17 global asset allocation report.

Investors are funneling cash into high-yield securities as central banks from the U.S. to Japan suppress borrowing costs through bond purchases to ignite a global economy that grew at the slowest pace last year since 2009, Bloomberg data show.

Junk Issuance

Borrowers have sold $176.9 billion of dollar-denominated, speculative-grade bonds this year, the most for the period on record, the data show. Yields on the notes plunged to an unprecedented 5.98 percent on May 9, Bank of America Merrill Lynch index data show.

While the Barclays U.S. High Yield Index has never returned between 6 percent and 10 percent in its 23-year history, this year may be different, Barclays strategists wrote in a report titled “The Year of the ‘Coupon’ Return.” The lack of volatility in both interest rates and credit may result in 2013 returns “that are the closest to coupon that we have ever seen in high yield,” according to the report.

High-yield, high-risk bonds are graded below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s. JPMorgan and Barclays had the top-ranked teams in speculative-grade debt strategy in 2012, according to Institutional Investor magazine’s All-America fixed-income rankings.

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