High-Yield Bond Market Revives Substantially
Standard & Poor's - 21 April
NEW YORK April 21, 2006--After turning in a sub-par performance in 2005, the high yield market has revived substantially so far in 2006, boosted by the strength of the first quarter economy, according to a report published today by Standard & Poor's Ratings Services. With real GDP growth estimated to have risen at a 4.8% rate compared to the anemic 1.7% rate seen during the fourth quarter of 2005, and no major dislocations in credit markets, high yield debt managed to outshine other key fixed income asset classes. The article, titled "U.S. High Yield Monthly: Cautionary Flags," reports that credit quality has improved and spreads have been grinding tighter while returns have surpassed other asset classes. The ongoing search for yield and better recoveries on defaulting debt has reduced risk aversion among large institutional investors, so much so that the high yield market has shrugged off the rise in Treasury yields. High yield credits are now expected to continue sideways for another month or two, with GDP growth holding up at 4.0% during the second quarter and the Fed completing its tightening cycle by May at a 5.00% fed funds target. "However, the below 3.0% growth projected for the second-half of the year and into 2007 has historically not favored the high yield market, and a cautionary position on this asset class remains," observed Diane Vazza, Managing Director and head of Standard & Poor's Global Fixed Income Research. A short duration posture coupled with moving to higher credit qualities continues to be advocated since the gains from taking on more risk are likely to effervesce in a rising default rate environment.
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