Junk-Bond Buying Seen Boosted by Economy, Moody’s Says

Investors will continue buying junk debt as the U.S. economy improves even after the Federal Reserve ends its asset purchases that have forced corporate bond yields lower, according to Moody’s Investors Service.

“Gradually accelerating economic growth and a relatively low level of debt maturities will support investors’ expectations that the default rate will remain low for another year or more,” Bill Wolfe, a senior vice president at Moody’s who led the report, said in a statement. “They therefore will continue to put their money into lower-rated companies.”

The credit grader expects default rates of risky borrowers in the U.S. to rise to 2.76 percent by September 2015 from 1.71 percent last month. The U.S. speculative-grade default rate’s long-term average is about 4.5 percent, according to a Moody’s statement on Sept. 16. High-risk, high-yield debt is ranked below Baa3 by Moody’s and less than BBB- at Standard & Poor’s.

As long as the default rate remains “relatively benign, investors can then think they’re not going to lose money and can continue to support the asset class,” Wolfe said in a telephone interview from Toronto.

Since 2011, the Fed’s quantitative easing program “has played a major role in expanding the supply of credit to low-rated companies,” according to Wolfe. Junk-rated issuers have rushed to take advantage of historically cheap borrowing costs as strong investor demand pushed yields to record lows.

Speculative-grade bond yields dropped to an unprecedented 5.69 percent in June, according to the Bank of America Merrill Lynch U.S. High Yield Index.

The average ratio of debt to earnings before interest, taxes, depreciation and amortization of junk issuers rose to 5.1 times in the year ended March, the highest level since at least 2005, Moody’s data show.

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