By Cristina Alesci
May 1 (Bloomberg) -- High-yield corporate bonds rallied the most since Michael Milken helped create a market for the securities in the 1980s.
Junk bonds returned 11 percent in April, the best performance since at least 1987, according to Merrill Lynch & Co.’s U.S. High Yield Master II index. The debt outperformed the Standard & Poor’s 500, U.S. Treasuries and investment-grade bonds.
Investors injected $1.79 billion into U.S. high-yield bond funds in the four weeks ended April 29, according to AMG Data of Arcata, California. Buyers realized that the risk of high corporate defaults was already reflected in the yield relative to benchmark rates, said Citigroup Inc. high-yield strategist John Fenn.
“There was a lot of cash without a lot of issuance,” New- York-based Fenn said. “The imbalance has created a feeding frenzy, in particular for managers who were defensive at the start of the rally. This is a little bit of catch up.”
High-yield gains last month beat the S&P’s 9.4 percent climb and Treasuries, which fell 1.9 percent.
There is about $11 trillion in cash earning minimal profit on the sidelines, saidTodd Youngberg, who helps manage $3 billion in high-yield assets at Aviva Investors in Chicago, in a note to investors today. Some of the money is moving into junk bonds, he said.
Speculative-grade spreads narrowed 358 basis points in April, the biggest monthly decline on record, to an almost seven-month low of 1,345 basis points, Merrill data show.
Jump in Issues
The rally spurred more speculative-grade companies to issue debt, taking advantage of a drop in spreads. Sales of high-yield bonds in 2009 jumped to $21.8 billion from $4.4 billion in the previous four months, according to data compiled by Bloomberg. Issuance this year compares with $18.4 billion in the same period of 2008.
The percentage of high-yield corporate bonds trading at distressed levels plunged to the lowest level since September, when Lehman Brothers Holdings Inc. filed for bankruptcy, freezing global credit markets.
The percentage of junk bond issues with yields at least 1,000 basis points more than Treasuries of similar maturity fell to 57 percent yesterday from 70 percent March 31, according to Merrill Lynch data. The ratio was 40 percent at the end of September and 19 percent at the end of April 2008. A basis point is 0.01 percentage point.
Junk-bond prices have increased even as S&P and Moody’s Investors Service predict rising corporate defaults.
Rise in Defaults
Forty issuers worldwide defaulted in April, the highest tally since S&P recorded 47 defaults in March 2002, analysts led by Diane Vazza said today in a report. April defaults, the second most since S&P began chronicling the data in 1981, brings this year’s total to 102.
“The market appears to be putting aside the fundamentals in credit defaults, which are still going to double from where they are today,” said Kingman Penniman, president of high-yield research firm KDP Investment Advisors.
Junk bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.
To contact the reporter on this story: Cristina Alesci in New York atcalesci2@bloomberg.net
