NEW YORK - By LESLIE WINES
Issuers of high yield junk bonds will try to determine in September whether investors are up for taking on risk after the market was brought to an almost complete standstill last month.
Market players unnerved by the deterioration of the below prime mortgage market had vehemently turned against junk bonds and other assets carrying high levels of risk.
"The high-yield market was shut down in August," said Mirko Mikelic, a senior portfolio manager at Fifth Third Asset Management. "But this month will be touch and go for junk bonds."
"Insurance companies still need to put money to work, although the market is still extremely nervous," he said, pointing out that some buyers may be coaxed back into the market by the fact that the default rates for junk bonds remain at multiyear lows.
He predicted the junk bond market's price activity this month will be dictated by news flow. "Expect a wild roller-coaster ride once some bad news (about credit markets) comes out," he said.
Hugh Johnson, the chairman of Johnson Illington Advisers, said the near-term direction of the high-yield corporate bond market is "a tougher question than ever before," but the market should rebound sooner or later.
"It is very tough to protect the future of the market because we are reaching emotional extremes," he said. "Investors have been nearly hysterical and bond market spreads have been jumping."
A spread represents the difference between the yield of a corporate bond and that of a Treasury note of comparable maturity. Rising spreads point to investor discomfort with bonds.
"Emotional extremes are scary, but they also represent opportunity," Johnson said. "I cannot tell you whether this is the time to jump in on junk, but somewhere around now will be the time. Opportunity is starting to stir. I guess if you are very risk-oriented you can start buying now."
By contrast, investment grade corporate bonds, which carry the highest ratings, were in high demand in August as investors ran from risk. That trend can only accelerate this month, according to Richard Peterson, a senior research analyst at Thomson Financial.
Last month, $76.7 billion in investment grade bonds were issued, the highest amount ever issued in August, according to Thomson Financial data. Heavy issuers included many financial institutions, such as Citigroup Inc. which sold $7.8 billion in bonds, Merrill Lynch & Co. Inc., with $6.2 billion, Deutsche Bank AG, with $4.5 billion and Bank of America Corp., with $4.2 billion.
Well before last month's emotionally driven flight-to-quality plays, junk bonds staged a vigorous rally. Earlier this year, investors searching for higher yields, sought out the above average yields that below investment grade bonds offer and appeared blithe about risk.
