| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Junk Bonds Defy Krugman’s Bubble Warning as Loomis Sees Gains |
By Pierre Paulden and Caroline Salas
Jan. 14 (Bloomberg) -- The world’s biggest bond investors are brushing off concern that the high-yield market is a bubble poised to burst after the Federal Reserve’s zero interest-rate policy spurred returns of 57.5 percent last year.
While Nobel Prize-winning economist Paul Krugman and Morgan Stanley’s Stephen Roach see as much as a 40 percent chance for another recession, Loomis Sayles & Co. says debt of the neediest corporate borrowers may be the best bonds to own for 2010.
Loomis, MFC Global Investment Management and Fridson Investment Advisors say junk debt will outperform other types of fixed-income securities while the government pursues another record year of Treasury sales. Investors say the bonds aren’t overvalued because yields over benchmarks are still 0.95 percentage point wider than the median during the past 13 years. Also, the debt is less sensitive than higher-ranked credit to an increase in interest rates, they say.
“I think there’s good value,” said Kathleen Gaffney, co- manager of the flagship Loomis Sayles Bond Fund, which has beaten 97 percent of its peers over the past five years. “High- yield debt also gives you a good cushion next year when everyone’s a little bit on tenterhooks regarding interest rates. We’re going to be in an environment where the economy is improving, but slowly, so having that yield advantage is really important.”
Junk Bonds, Stocks
After losing 26.4 percent in 2008, junk bonds had record returns last year, according to the Merrill Lynch U.S. High Yield Master II index, as the Federal Reserve and government agencies lent, spent or guaranteed $8.2 trillion to lift the economy from the worst recession since the Great Depression.
Junk bonds returned 31 percentage points more than the Standard & Poor’s 500 Index’s 26.5 percent in 2009. The gap exceeded the previous record of 20.2 percentage points in 2002, Merrill Lynch index data show.
Companies raised a record $162.6 billion from U.S. high- yield sales in 2009, according to data compiled by Bloomberg. Issuance may reach a record again this year, debt research firm CreditSights Inc. said in a Jan. 11 report.
Speculative-grade debt is rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.
Top-ranked high-yield strategist Peter Acciavatti at JPMorgan Chase & Co. in New York predicts junk bonds will gain at least 9.8 percent in 2010. Acciavatti’s team has been ranked first among its peers in Institutional Investor magazine’s annual survey for the past seven years. The securities have already gained 2.2 percent this year, according to Merrill Lynch data.
‘Cautiously Optimistic’
The highest proportion of high-yield investors on record cited the asset class as their top pick for 2010 in Bank of America Merrill Lynch’s fourth-quarter global survey. The survey showed 53 percent of investors have a higher percentage of junk debt in their portfolios relative to benchmark indexes, 2 percentage points below the record in the third quarter.
“We’re cautiously optimistic on the economy and high- yield,” said Cliff Noreen, president of Babson Capital Management LLC. “We expect defaults to decline.” The Springfield, Massachusetts-based firm, which manages $112.5 billion, sees returns of 8 percent to 9 percent on the debt in 2010, Noreen said.
The International Monetary Fund is poised to raise the 3.1 percent forecast it made in October for global growth in 2010 as emerging markets lead a worldwide recovery, the organization said Jan. 6. Combined profit for S&P 500 Index companies surged 62 percent during the fourth quarter in the first increase since 2007, according to the average analyst estimates in a Bloomberg survey.
Chances of Recession
The Fed pledged Dec. 16 to keep rates “exceptionally low” for an “extended period,” even as investors bet an accelerating recovery will fuel inflation and damp demand for government debt.
U.S. public debt rose 58 percent to $7.175 trillion as of November from $4.537 trillion in December 2007 as the government has borrowed to finance two stimulus programs and fund record budget deficits. The U.S. budget deficit reached $1.4 trillion for fiscal 2009.
Krugman sees about a one-third chance the U.S. economy will slide into a recession during the second half of the year as fiscal and monetary stimulus fade.
“It is not a low probability event, 30 to 40 percent chance,” Krugman said Jan. 4 in an interview in Atlanta, where he was attending the annual meeting of the American Economic Association. “The chance that we will have growth slowing enough that unemployment ticks up again I would say is better than even.”
Asset Bubble
“This is not rocket science,” Roach said on Jan. 5. “This is a much more significant possibility than the average investor is willing to concede.”
Low rates may “for sure” create an asset bubble in the junk-bond market, said Kenneth Rogoff, a Harvard University professor and a former chief economist at the IMF. “I care when there’s massive borrowing, especially short-term borrowing, that’s fueling asset-price rising. That I think is a big cause for concern.”
Some of the lowest-rated bonds are rallying the most. York, Pennsylvania-based Bon-Ton Stores Inc.’s $509 million of 10.25 percent notes due in 2014, rated Caa2 by Moody’s, are trading at 94.75 cents on the dollar since a record low of 11.5 cents on Feb. 10, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
JohnsonDiversey
Companies are selling debt with terms last seen before credit markets froze. JohnsonDiversey Holdings Inc., a Sturtevant, Wisconsin, maker of cleaning supplies, sold $250 million of bonds that can pay interest in the form of new debt in November. Since then companies have sold more than $1.6 billion of so-called payment-in-kind bonds, according to Bloomberg data.
“Right now the high-yield bond market is being overly generous to issuers,” said Michael Tennenbaum, the founder of Tennenbaum Capital Partners LLC in Santa Monica, California. “Some of the new issues are from unattractive companies and the yields on those are too low.”
The banks are arranging the debt to satisfy demand from high-yield bond funds, said Tennenbaum, who manages the $1.34 billion Tennenbaum Opportunities Fund V LLC, which had the fifth-best performance among hedge funds during the first nine months of last year, according to the February 2010 issue of Bloomberg Markets magazine.
Bond Investors Buying
“The market has to go down at some point and these managers will be compelled to sell to meet redemptions,” he said. The absence of dealers willing to step in means you could see “a cascading downwards price.”
Those fears aren’t stopping some of the largest bond investors from targeting the debt.
“Bubbleheads aren’t looking at present conditions,” said Martin Fridson, chief executive officer for money management firm Fridson Investment Advisors in New York. “They’re basing their case on bearish future scenarios for the economy,” said Fridson, who began his career as a corporate bond trader in 1976.
Loomis’s Gaffney, who is based in Boston, sees value in credits graded BB, S&P’s highest junk tier, that may be raised to investment grade, including Nashville, Tennessee-based hospital operator HCA Inc. and Georgia-Pacific LLC, a unit of Koch Industries Inc. of Wichita, Kansas.
HCA Bonds
HCA’s $1.58 billion of 9.625 percent pay-in-kind bonds due in 2016 have risen to 109.5 cents on the dollar from 77 cents last March, Trace data show.
Georgia-Pacific’s $600 million of 8.125 percent notes due in 2011 are trading at 105.25 cents on the dollar after falling to 94.5 cents in January 2009.
Prospects for the debt will also improve with the default rate declining to 4 percent in 2010 from 11 percent last year, Acciavatti said. If defaults decline to 2 percent, returns may be as high as 14.1 percent, he predicts.
The fourth quarter global-speculative default rate was 1.5 percent compared with the historical average of 1.13 percent, according to Fridson.
S&P raised the ratings on 184 U.S. companies last quarter and cut 182, the first time upgrades exceeded downgrades since the three months ended June 30, 2007, Bloomberg data show.
“My investment strategy is adding high yield,” said Dan Janis, senior vice president at MFC Global and manager of the $1.6 billion John Hancock Strategic Income Fund. “I’m making the assumption we don’t have the double dip.”
--Editors: Alan Goldstein, Robert Burgess
To contact the reporters on this story: Pierre Paulden in New York at +1-212-617-3759 or ppaulden@bloomberg.net; Caroline Salas in New York at +1-212-617-2314 or csalas1@bloomberg.net
To contact the editor responsible for this story: Alan Goldstein at +1-212-617-6186 or agoldstein5@bloomberg.net
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