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Junk Bonds Have Room To Run |
Forbes.com - Oct. 29, 2009 - by Matthew Craft
The ongoing recovery in credit markets can sometimes look unstoppable. When William Chepolis, a portfolio manager at DWS Investments, the money management arm of Deutsche Bank, checks bond prices every morning he's regularly surprised. As cash flows into fixed-income funds and money managers bid up bonds of all types, the distance between yields on Treasury bonds and other assets – a "spread" in bond-speak – keeps shrinking.
"Everyday, you come in and say, 'Geeze. I thought spreads were tight yesterday,'" Chepolis said.
At a press briefing Tuesday afternoon, money managers from Deutsche Bank ( DB - news - people ) surveyed the fixed-income markets and, while offering a few words of caution, welcomed their return to health. For the near future at least the market for risky assets like high-yield junk bonds should remain steady. But prices can only climb so high.
"The question now is how good are things going to get?" said Gary Sullivan, head of high-yield bond portfolio management. Bonds from companies with the greatest chance of failing have returned 51% this year. Spreads on these high-yield bonds have dropped from 21.8 percentage points last December 15 to a recent 7.35.
The rapid turnaround in credit markets is understandable when you look at the flow of cash into fixed-income funds, Sullivan said. Investors have dropped $20.4 billion into high-yield funds and $68 billion into other U.S. bond funds this year, according to fund tracker EPFR Global. Corporate bonds paying 9% to 5% look more appealing than money market funds yielding less than 1%. Uncertainty over the economy's path also keeps some investors from putting their savings in stocks, he added.
When investors chase yield it's usually a sign that a credit rally has neared its end, said Matthew MacDonald, a senior portfolio manager. He's concerned that investors could push spreads tighter than warranted and set credit markets up for a fall.
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