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REAL WORLD EVENT DISCUSSIONS
Risk builds as junk bonds boom
Sunday, August 19, 2012 7:03 AM
Gettin' old, but still a hippie at heart...
Quote:Money market funds pay next to nothing. Interest rates on United States Treasuries are dismal. The volatile stock market has been dead money for more than a decade.
But on Wall Street — as the old saying goes — somewhere, someone is making money. And these days, that somewhere is junk bonds.
The market for junk bonds, risky corporate debt that pays high interest rates, is red hot. Such debt, also known as high-yield bonds, has returned 10.2 percent year-to-date, according to a JPMorgan high-yield index. Junk bond funds are on a pace to take in a record amount of money this year. Companies with less than stellar credit are issuing hundreds of billions of dollars of bonds.
Fueling this frenzy are investors of all stripes — including individuals, mutual funds and state pensions — who are desperate for returns in their bond portfolios and willing to take more risk to get them. Demand is insatiable, even as analysts warn that the market has become overheated and is ripe for a fall.
“In a yield-starved world, high-yield bonds are right now the only game in town,” said Les Levi, a managing director at the investment bank North Sea Partners. “The market is giddy.”
But a funny thing has happened as everyone has piled into this bond market: high-yield bonds have become something of a misnomer.
The average yields on these bonds have dropped to 6.6 percent, hovering near a record low, according to the Barclays high-yield index. Historically, the interest rate paid on high-yield bonds has been 10 percent or higher. And over the last weeks, several companies have issued speculative-grade debt at yields hardly ever seen in the junk bond market.
“It’s amazing: You’re now seeing 4 to 5 percent yields for weaker companies,” said Adam B. Cohen, founder of Covenant Review, a credit research firm. “These are the type of yields that you used to see for blue chips like Exxon and Pepsi.”
Consider the CIT Group, the small-business lender, which three years ago was on the brink of collapse. The company eventually emerged from bankruptcy, hobbled from the wounds it suffered in the financial crisis.
Late last month, investors snapped up $3 billion worth of bonds sold by CIT, which credit ratings agencies continue to view as a risky issuer. The company is paying an interest rate of 4.25 percent on one part of the bonds, and 5 percent on the other. CIT has raised almost $10 billion in junk debt in 2012, making it the year’s largest issuer of high-yield bonds.Lots more at http://dealbook.nytimes.com/2012/08/15/risk-builds-as-junk-bonds-boom/
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