Post by MMM on Apr 6, 2010 10:07:16 GMT 4
‘Unloved’ Junk Debt May Be Best Bond Investment: Credit Markets
By Pierre Paulden and Shannon D. Harrington
April 6 (Bloomberg) -- Speculative-grade bonds with the highest rankings may offer the best returns after trailing the riskiest debt in a record credit-market rally.
Goldman Sachs Group Inc. is recommending high-yield, high- risk bonds with rankings in the BB tier, the first below investment grade on the Standard & Poor’s scale. Pioneer Investment Management Inc. favors BB and B bonds, the next lowest bracket, while saying the riskiest debt is overvalued. Debt ranked in the BB category gained 39.1 percent in the past 12 months, underperforming the CCC tier by 66 percentage points, according to Bank of America Merrill Lynch index data.
Junk bonds have rallied at an unprecedented pace since December 2008 after the market seizure that followed the failure of Lehman Brothers Holdings Inc. Companies are issuing record amounts of the debt as the economy improves, corporate default rates decline and the Federal Reserve holds interest rates at near zero, spurring investors to seek higher yields.
“BBs have been in an unloved space, too risky for investment-grade investors but not risky enough for high-yield investors,” said Alberto Gallo, a strategist at Goldman Sachs in New York. “That has preserved a lot of value.”
Investors seeking higher returns amid low rates will drive up prices on BB debt, which also offer some protection from defaults if the economic recovery flags, Gallo said.
Gains in speculative-grade debt are justified by lower default rates, said Andrew Feltus, a money manager who helps oversee $8 billion of high-yield debt at Pioneer in Boston. His $2.8 billion Pioneer High Yield Fund has returned 64.3 percent in the past year, in the top 5 percent of funds, according to data compiled by Bloomberg.
‘CCCs Look Rich’
“CCCs look rich to me,” Feltus said. “We’re not in love with leveraged buyouts, and the default rates will be higher for these securities.”
High-yield, high-risk, or junk, debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt fell yesterday to 148 basis points, or 1.48 percentage point, the lowest since November 2007, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Average yields rose to 4.075 percent, the highest since Feb. 24.
Treasury 10-year note yields climbed to 4 percent for the first time since June as evidence the economic recovery is gaining traction added to concern that debt sales to fund record deficits will overwhelm demand. Yields on Fannie Mae and Freddie Mac mortgage securities that guide home-loan rates rose to the highest in almost eight months.
Leveraged Loans
Leveraged loan prices rose 0.07 cent to 91.91 cents on the dollar, the highest since June 2008, according to the S&P/LSTA U.S. Leveraged Loan 100 index. Supervalu Inc., the second- largest U.S. grocery chain, extended the maturity of $2 billion of bank loans to 2015, according to a person familiar with the transaction.
Ten-year Treasury yields rose as a gauge of service industries and pending sales of U.S. homes rose more than forecast. The 10-year note yield increased 4 basis points, or 0.04 percentage point, to 3.98 percent as of 4:41 p.m. in New York, according to BGCantor Market Data. The yield reached 4.0095 percent, the highest level since Oct. 16, 2008.
Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds climbed 0.11 percentage point to 4.67 percent, the highest level since Aug. 10, Bloomberg data show. The Fed ended its unprecedented purchases of the debt last week.
Credit-Default Swaps
Supervalu arranged with lenders led by Royal Bank of Scotland Group Plc and Credit Suisse Group AG to push out $1.5 billion of its $2 billion revolving line of credit to April 2015 from June 2011, said the person, who declined to be identified because the transaction is private. The Eden Prairie, Minnesota- based retailer also extended $500 million of its $1 billion term loan to October 2015 from June 2012, the person said.
The extended revolver will pay an interest rate 2.25 percentage points more than the London interbank offered rate, up from 1 percentage point more than Libor on the existing credit line, the person said. Three-month Libor, a borrowing benchmark, is 0.29 percent, the highest since September.
An indicator of corporate credit risk fell to the lowest in more than two weeks.
The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that is tied to 125 companies in the U.S. and Canada, dropped 1.7 basis point to a mid-price of 83.4 basis points, according to Markit Group Ltd.
Asian Swaps
The Markit iTraxx Australia index dropped 4 basis points to 80.5 basis points, according to Westpac Banking Corp., while the Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell 1 basis point to 93.5 basis points, Royal Bank of Scotland prices show.
The Markit iTraxx Japan index advanced 1 basis point to 93 basis points in Tokyo, according to Morgan Stanley.
Investors use the default-swap indexes to hedge against losses on corporate debt or speculate on creditworthiness, and the swaps typically rise as investor confidence deteriorates.
Credit-default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point equals $1,000 annually on a contract protecting $10 million of debt for five years.
Nexstar Broadcasting Group Inc. of Irving, Texas, and Fort Myers, Florida-based Radiation Therapy Services Inc. led five companies that began marketing at least $1.34 billion of high- yield bonds yesterday.
Borrowing Costs
Companies in the U.S. have issued $70.125 billion of junk bonds in 2010 as corporations with speculative-grade rankings sought to take advantage of the lowest borrowing costs since October 2007. That compares with $12.8 billion for the same period in 2009, Bloomberg data show. The Bank of America Merrill Lynch U.S. High Yield Master II index gained 4.99 percent this year, following a 57.5 percent return in 2009. Debt graded in the CCC tier and below has more than doubled in the past year.
Spreads on BB ranked debt have fallen 0.66 percentage point to 4.07 percentage points since the start of the year, the Bank of America Merrill Lynch index shows. That’s down from the record spread of 14.68 percentage points in December 2008 and above the long-term average of 3.84 percentage points.
For debt ranked CCC and lower, relative yields have declined 0.81 percentage point this year to 9.19 percentage points, index data show. That compares to the record 44.3 percent spread over benchmarks in December 2008 and is below the long-term average of 12.56 percentage points, index data show.
‘Sweet Spot’
The bonds of companies with the highest junk ratings are poised to thrive in an economy that may slow as the Fed begins withdrawing a record $1 trillion in excess cash that propped up the banking system during the recession.
“BBs in particular are the sweet spot for a slow recovery environment,” said Goldman Sachs strategist Gallo, who said investors in the bonds will benefit as the Fed keeps interest rates low to guard against another slump, while foreign investors seek higher yielding assets that offer a cushion against another slowdown.
Goldman Sachs, based in New York, estimates that the economy will grow at 2.6 percent in 2010, below the 3 percent median forecast, Bloomberg data show.
While Moody’s said the speculative-grade default rate will decline to 2.9 percent by the end of the year from a record 12.9 percent in November, companies with the lowest rankings will need a strong recovery to reduce debt and avoid default, Gallo said.
Fed officials said they planned to keep the main overnight interest rate near zero for an “extended period” after meeting on March 16.
To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net
By Pierre Paulden and Shannon D. Harrington
April 6 (Bloomberg) -- Speculative-grade bonds with the highest rankings may offer the best returns after trailing the riskiest debt in a record credit-market rally.
Goldman Sachs Group Inc. is recommending high-yield, high- risk bonds with rankings in the BB tier, the first below investment grade on the Standard & Poor’s scale. Pioneer Investment Management Inc. favors BB and B bonds, the next lowest bracket, while saying the riskiest debt is overvalued. Debt ranked in the BB category gained 39.1 percent in the past 12 months, underperforming the CCC tier by 66 percentage points, according to Bank of America Merrill Lynch index data.
Junk bonds have rallied at an unprecedented pace since December 2008 after the market seizure that followed the failure of Lehman Brothers Holdings Inc. Companies are issuing record amounts of the debt as the economy improves, corporate default rates decline and the Federal Reserve holds interest rates at near zero, spurring investors to seek higher yields.
“BBs have been in an unloved space, too risky for investment-grade investors but not risky enough for high-yield investors,” said Alberto Gallo, a strategist at Goldman Sachs in New York. “That has preserved a lot of value.”
Investors seeking higher returns amid low rates will drive up prices on BB debt, which also offer some protection from defaults if the economic recovery flags, Gallo said.
Gains in speculative-grade debt are justified by lower default rates, said Andrew Feltus, a money manager who helps oversee $8 billion of high-yield debt at Pioneer in Boston. His $2.8 billion Pioneer High Yield Fund has returned 64.3 percent in the past year, in the top 5 percent of funds, according to data compiled by Bloomberg.
‘CCCs Look Rich’
“CCCs look rich to me,” Feltus said. “We’re not in love with leveraged buyouts, and the default rates will be higher for these securities.”
High-yield, high-risk, or junk, debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt fell yesterday to 148 basis points, or 1.48 percentage point, the lowest since November 2007, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Average yields rose to 4.075 percent, the highest since Feb. 24.
Treasury 10-year note yields climbed to 4 percent for the first time since June as evidence the economic recovery is gaining traction added to concern that debt sales to fund record deficits will overwhelm demand. Yields on Fannie Mae and Freddie Mac mortgage securities that guide home-loan rates rose to the highest in almost eight months.
Leveraged Loans
Leveraged loan prices rose 0.07 cent to 91.91 cents on the dollar, the highest since June 2008, according to the S&P/LSTA U.S. Leveraged Loan 100 index. Supervalu Inc., the second- largest U.S. grocery chain, extended the maturity of $2 billion of bank loans to 2015, according to a person familiar with the transaction.
Ten-year Treasury yields rose as a gauge of service industries and pending sales of U.S. homes rose more than forecast. The 10-year note yield increased 4 basis points, or 0.04 percentage point, to 3.98 percent as of 4:41 p.m. in New York, according to BGCantor Market Data. The yield reached 4.0095 percent, the highest level since Oct. 16, 2008.
Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds climbed 0.11 percentage point to 4.67 percent, the highest level since Aug. 10, Bloomberg data show. The Fed ended its unprecedented purchases of the debt last week.
Credit-Default Swaps
Supervalu arranged with lenders led by Royal Bank of Scotland Group Plc and Credit Suisse Group AG to push out $1.5 billion of its $2 billion revolving line of credit to April 2015 from June 2011, said the person, who declined to be identified because the transaction is private. The Eden Prairie, Minnesota- based retailer also extended $500 million of its $1 billion term loan to October 2015 from June 2012, the person said.
The extended revolver will pay an interest rate 2.25 percentage points more than the London interbank offered rate, up from 1 percentage point more than Libor on the existing credit line, the person said. Three-month Libor, a borrowing benchmark, is 0.29 percent, the highest since September.
An indicator of corporate credit risk fell to the lowest in more than two weeks.
The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that is tied to 125 companies in the U.S. and Canada, dropped 1.7 basis point to a mid-price of 83.4 basis points, according to Markit Group Ltd.
Asian Swaps
The Markit iTraxx Australia index dropped 4 basis points to 80.5 basis points, according to Westpac Banking Corp., while the Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell 1 basis point to 93.5 basis points, Royal Bank of Scotland prices show.
The Markit iTraxx Japan index advanced 1 basis point to 93 basis points in Tokyo, according to Morgan Stanley.
Investors use the default-swap indexes to hedge against losses on corporate debt or speculate on creditworthiness, and the swaps typically rise as investor confidence deteriorates.
Credit-default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point equals $1,000 annually on a contract protecting $10 million of debt for five years.
Nexstar Broadcasting Group Inc. of Irving, Texas, and Fort Myers, Florida-based Radiation Therapy Services Inc. led five companies that began marketing at least $1.34 billion of high- yield bonds yesterday.
Borrowing Costs
Companies in the U.S. have issued $70.125 billion of junk bonds in 2010 as corporations with speculative-grade rankings sought to take advantage of the lowest borrowing costs since October 2007. That compares with $12.8 billion for the same period in 2009, Bloomberg data show. The Bank of America Merrill Lynch U.S. High Yield Master II index gained 4.99 percent this year, following a 57.5 percent return in 2009. Debt graded in the CCC tier and below has more than doubled in the past year.
Spreads on BB ranked debt have fallen 0.66 percentage point to 4.07 percentage points since the start of the year, the Bank of America Merrill Lynch index shows. That’s down from the record spread of 14.68 percentage points in December 2008 and above the long-term average of 3.84 percentage points.
For debt ranked CCC and lower, relative yields have declined 0.81 percentage point this year to 9.19 percentage points, index data show. That compares to the record 44.3 percent spread over benchmarks in December 2008 and is below the long-term average of 12.56 percentage points, index data show.
‘Sweet Spot’
The bonds of companies with the highest junk ratings are poised to thrive in an economy that may slow as the Fed begins withdrawing a record $1 trillion in excess cash that propped up the banking system during the recession.
“BBs in particular are the sweet spot for a slow recovery environment,” said Goldman Sachs strategist Gallo, who said investors in the bonds will benefit as the Fed keeps interest rates low to guard against another slump, while foreign investors seek higher yielding assets that offer a cushion against another slowdown.
Goldman Sachs, based in New York, estimates that the economy will grow at 2.6 percent in 2010, below the 3 percent median forecast, Bloomberg data show.
While Moody’s said the speculative-grade default rate will decline to 2.9 percent by the end of the year from a record 12.9 percent in November, companies with the lowest rankings will need a strong recovery to reduce debt and avoid default, Gallo said.
Fed officials said they planned to keep the main overnight interest rate near zero for an “extended period” after meeting on March 16.
To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net